Can You Rollover a 529 Into an IRA?
Changes to education savings rules offer families who find themselves with unspent funds options for rolling them over into Roth IRAs without incurring taxes and penalties.
Rollover contributions remain subject to annual IRA contribution limits, and your 529 account must have been open for at least 15 years prior to taking this path:
Although the new rollover rule offers account holders and beneficiaries an effective solution for dealing with leftover 529 funds, it does not address all concerns surrounding these accounts. For example, it remains unclear when or if the 15 year clock will start ticking, whether changing beneficiaries resets it, and how much money can be moved at any one time.
As it remains important to keep in mind that money in a 529 plan must only be spent on qualified education expenses, any funds not used towards that end may be subject to taxes and a 10% federal penalty tax. Consulting with a financial advisor prior to making decisions will help assess your needs and make informed choices – perhaps rolling over their 529 into Roth IRA can even be an effective strategy to save for their retirement!
Many families worry that they have put away too much money into a 529 college savings plan, yet have too much saved in one. To ease these concerns, the SECURE 2.0 Act includes a provision allowing any unspent funds in 529s to be converted to Roth IRAs instead, bypassing income tax and the 10% penalty associated with non-qualified withdrawals.
Thrivent financial advisors are available to help you navigate this new rule and decide whether it makes sense for your situation. Benefits of rolling over include reduced investment costs in retirement accounts as well as the potential to start saving early in life.
Before initiating a rollover, contact both 529 and Roth IRA providers and inquire as to the best method for transferring the funds directly. In an ideal world, this should involve trustee-to-trustee transfers. However, be mindful that such transfers may require a 15-year holding period before being released for transfer; additionally if beneficiaries of Roth IRAs change, restarting this timer.
Families typically use 529 accounts to cover education expenses. But in cases when beneficiaries no longer require that amount for schooling expenses, the funds can often be moved into an IRA instead – an approach with lower fees and tax advantages.
At present, beneficiaries can transfer 529 assets directly into Roth IRAs without incurring taxes or penalties, however this option will only remain available through 2024 and requires that an IRA owner has includible compensation at least equal to the amount transferred. It should also be remembered that changes in beneficiaries may trigger a 15-year holding period for these transferred funds.
This new rule allows parents to transfer their 529 funds directly to other family members – including spouses; sons and daughters and their siblings; first cousins with spouses and their families; as well as nephews, nieces, and their spouses – making future savings simpler for families – such as graduate school costs or other qualified expenses.
No matter whether your student decides not to attend college as planned or you saved more than necessary, the SECURE 2.0 Act allows you to convert excess 529 funds to Roth IRAs with certain restrictions in mind. However, there are a few requirements to keep in mind for such conversion.
Rollover must occur within 60 days of withdrawing funds from a 529 account and open in the beneficiary’s name; additionally, the 529 must have been open for at least 15 years.
If you are considering this option, it is crucial that you consult with a financial professional first. They can assess your circumstances and help determine if this is indeed the best choice for your family. Furthermore, be mindful of any tax implications or fees associated with making the rollover as the IRS could modify rules or features as they receive feedback from financial professionals.
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