Can a 529 Plan Be Rolled Over to a Roth IRA?
However, there may be restrictions when rolling over any remaining 529 funds to a Roth IRA for your beneficiary account.
Earnings withdrawn from a 529 plan for nonqualifiable expenses are subject to both a 10% penalty and ordinary income taxes; additionally, an annual Roth IRA contribution limit applies.
What is a 529 plan?
A 529 plan is an education savings account offered by most states that allows families to save for college education expenses while taking advantage of federal and state income tax advantages. Withdrawals from 529 accounts typically qualify as qualified education expenses such as tuition fees, room and board costs, textbooks and computer “peripheral equipment.”
Americans have amassed nearly $432 billion in college savings vehicles like 529 plans. Many of these funds can be transferred directly into Roth IRAs or another 529 account with certain restrictions in place; assets held within a 529 plan could impact eligibility for need-based financial aid awards so you should carefully consider its role within your overall college savings strategy. Many plans offer age-based investing options managed by low-cost firms like Vanguard and T. Rowe Price as well as prepay tuition plans with upfront discounts off future tuition bills.
How can I roll over my 529 plan?
A 529 plan rollover involves moving funds from one state’s 529 college savings program to another for various reasons, such as changing investment options or lowering fees. When doing this, however, be mindful of any state rules which might apply, including 15-year rules or potential “clawback” of deductions that were taken advantage of in previous years. A CPA or fiduciary financial advisor can assist in helping determine if moving your savings makes sense for your family.
Timing of any rollovers must also be carefully considered; according to IRS regulations, once per beneficiary per 12-month period can make use of a rollover without incurring additional tax penalties.
Transferring 529 accounts directly into an IRA requires direct transfers known as trustee-to-trustee or plan-to-plan rollover. Although these transfers do not count against your contribution limit, your total lifetime contributions must remain below IRS regulations.
Can I roll over my 529 plan to a Roth IRA?
529 plans have become one of the most popular methods of saving for college. Contributions grow tax free and withdrawals used solely for qualifying educational expenses aren’t taxable – yet sometimes beneficiaries no longer require all their money in an account – maybe because their major changed, their career changed path, or attending less expensive school is now an option.
SECURE 2.0 Act will enable individuals to move up to $35,000 of unused assets into Roth IRA accounts using plan-to-plan or trustee-to-trustee rollovers that meet annual Roth IRA contribution limits for each year.
Though this new option provides more flexibility for account owners, the process remains complex and may require the assistance of a wealth advisor or financial planner. Furthermore, questions remain regarding its implementation as well as how the IRS interprets this law.
Can I roll over my 529 plan to another state’s plan?
The IRS permits one tax-free rollover per beneficiary every 12 months. If your beneficiary holds multiple 529 accounts, all plan owners should coordinate to ensure only one rollover occurs. Also consult with a CPA or fiduciary financial professional prior to initiating this move as it may have tax implications, including potential state deduction clawback eligibility or potential other tax consequences.
While other countries such as France may still impose high tariffs, Australia, New Zealand, South Africa and Vietnam all enjoy tax exemption. If the original account owner of a 529 plan becomes aware that their child has chosen not to attend college or has received a significant scholarship, they can use these funds in their account for graduate school expenses, future medical school costs or up to $10,000 of federal or private student loan repayments for them or their siblings. Account owners can change the beneficiary of my529 to another qualifying family member or Roth IRA. Furthermore, they may redeem I/EE savings bonds or take a distribution from their Coverdell Education Savings Account and donate those proceeds directly into my529. Any transfer must include documentation showing both portions – principal and earnings.
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