Can You Rollover a 529 Into an IRA?
Your money in a 529 plan won’t be subject to taxes if used for qualified education expenses, but withdraws for non-qualifying expenses may incur income tax and a 10% penalty fee.
Families that have money stranded in 529 accounts may be eligible to transfer it tax-free into a Roth IRA account – though this offer will only last for a limited time period.
What is a 529 plan?
A 529 plan is a tax-advantaged investment account designed to help families save for the college education of their children. Funds invested in mutual funds can grow tax-deferred. Accounts offered by states and managed by various financial partners.
Funds in a 529 plan may be used to cover expenses at many different educational institutions, including four-year colleges, community colleges, trade schools, culinary institutes and graduate programs. Furthermore, they can be utilized for vocational schooling or vocational apprenticeship or certificate programs.
Accounts must be set up with beneficiaries in mind, who should include spouses or children but not parents. Account owners can change beneficiaries without incurring federal income taxes or 10% penalties; the rules surrounding these plans can be complex so for more advice consult a financial or tax professional.
What is a rollover?
Rollover refers to the process of moving funds between accounts. It is most frequently applied in relation to investing, when moving investments from one fund to another. While rollover can result in lower fees and taxes rates, it also may involve hidden costs that need to be considered before proceeding with this option.
Now, beneficiaries of 529 plans may roll their unused account balances over to a Roth IRA without incurring tax or penalty charges (under certain conditions). This significant change could help families who have saved for college but find themselves unable to use these accounts for education expenses.
This provision was included as part of SECURE 2.0, an omnibus federal spending bill approved by Congress in December 2022 and signed into law shortly afterwards. Prior to SECURE 2.0’s passage into law, only about one-third of 529 account balances were ever transferred into an IRA; with its passage into law likely more accounts will likely make this transition.
Can I rollover a 529 into an IRA?
A 529 education savings plan offers unique tax benefits that may allow you to set aside up to $35,000 without incurring federal income taxes or penalties when used for qualified educational expenses. Our financial advisors can assist in developing the perfect college savings strategy for you and your beneficiaries.
Unused funds in a 529 account may be converted to a Roth IRA for the same beneficiary with some restrictions: account owners must have earned income and contribution limits may apply.
This change to the law is an enormous benefit to families that want to retain the tax advantages offered by 529 plans, while giving more people another reason to open one. This is particularly advantageous if grandparents contribute funds directly into grandchildren’s plans – the new legislation makes it easier for them to take advantage of state tax incentives while creating more flexible retirement vehicles for themselves and their grandchildren.
Can I rollover a 529 into a Roth IRA?
Families now have the ability to convert any unused 529 funds to Roth IRAs starting next year thanks to Congress’ SECURE Act 2.0 legislation passed last December.
This new bill allows beneficiaries of 529 plans to roll over up to $35,000 into a Roth IRA in their name without incurring federal income tax or the 10% penalty, with this money eligible for use for retirement or qualifying education expenses such as tuition fees, books, supplies, room and board costs, student loan repayment and repayment of student loans.
But to protect yourself, ensure the IRA custodian receives funds directly from a 529 plan. Otherwise, if either yourself or the beneficiary receive the money directly, federal taxes and penalties could apply, as well as state taxes depending on local laws; contributions made directly into a Roth IRA count toward your yearly Roth contribution limit as with other Roth IRA contributions.
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