Can You Rollover a 529 Into an IRA?
A 529 plan provides parents and grandparents the ability to save tax-deferred for future education costs, including tuition fees, room and board, books and technology. Any withdrawals are tax-free as long as they’re used towards qualified expenses like tuition, fees, room and board or technology purchases.
Starting in 2024, under a provision in the SECURE Act 2.0, you can convert up to $35,000 of unused 529 assets into a Roth IRA for beneficiaries without incurring income taxes or incurring a 10% penalty. There are various important aspects to this new rule which you should keep in mind.
What is a 529 plan?
A 529 plan is a tax-advantaged savings account designed to pay for qualified education expenses. Administered by the beneficiary’s state of residency, these plans can provide both federal and state tax advantages such as deductions, credits and deductions.
529 funds accumulate tax-free and withdrawals can also be made tax-free if used for qualified education expenses; non-qualified withdrawals, however, could incur income taxes and a 10% penalty fee.
Before investing in a 529 plan, it’s essential to evaluate all your financial goals. For example, if you have consumer debt like credit card and student loan balances, it would be prudent to focus on paying that off first before considering other investment goals like building an emergency fund of three to six months of living expenses or starting to save 15% of income in retirement accounts such as 401(k)s or Roth IRAs. Finally, ensure your chosen plan has low fees; higher expenses could hinder investment returns over time.
What are the benefits of a 529 plan?
529 plans offer many advantages. Investment earnings earned and used towards qualifying education expenses are tax-free; additionally, contributions qualify for the $18,000 federal annual gift tax exclusion per beneficiary.
As well as federal benefits, many states offer additional state tax breaks when contributing to 529 accounts. For instance, Utah married couples filing jointly can contribute up to $4,080 annually under their state’s my529 plan and take advantage of a 5% state income tax deduction for this contribution.
Additionally, 529 plans can be an excellent way to save for retirement. Beginning in 2024, beneficiaries may move funds from their 529 account into a Roth IRA without incurring penalties; but consult a financial advisor first to ensure this is the best move for your family.
Can I rollover a 529 into an IRA?
From 2024 on, families will be able to convert any unspent funds in a 529 plan into a Roth IRA account for their beneficiary without incurring income tax or incurring the 10% penalty. Unfortunately, however, rules surrounding this process remain vague and subject to interpretation – such as whether changing beneficiaries restarts the 15 year holding period and whether or not the Roth IRA must belong solely to its beneficiary of the 529 account. Eventually the IRS may provide guidance that clarifies these issues, however until then, families should take all factors into consideration when making such transfers.
Parents whose children no longer need all the money they saved in a 529 plan may find relief with the new rule, which allows for tax-free rollover if withdrawals are used for qualified education expenses such as tuition and fees, books, room and board expenses incurred within five years prior to withdrawal from an account. It excludes earnings that were withdrawn during that period from any earnings that had previously been taken out from 529s.
Can I rollover a 529 into a Roth IRA?
Beginning in 2024, you’ll have the ability to roll over up to $35,000 worth of unused 529 plan assets into a Roth IRA for their beneficiary without incurring income tax or penalty penalties. This new rule included in SECURE Act 2.0 could prove useful for families that find themselves with excess funds in their 529 plans after their student graduates and needs somewhere safe to put them.
Please be aware that this option has a variety of stipulations; therefore it is advisable to speak to a financial advisor prior to making any decisions. Specifically, your account must have been open for at least 15 years prior to conversion into a Roth IRA; also changing beneficiaries may necessitate another 15 year holding period; finally converting assets from 529 plans into Roth IRAs will no longer provide tax deductions on contributions to those accounts.
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