Can I Roll a 529 Plan Into a Roth IRA?
If you have some extra funds in a 529 plan that are unclaimed, one option for investing it could be rolling it over into a Roth IRA.
However, you should keep several factors in mind when rolling over funds: (1) your rollover amount cannot exceed $35,000 in total and (2) it counts towards and is subject to annual IRA contribution limits.
What is a 529 plan?
Parents often feel responsible for leaving enough funds behind for college tuition and living expenses for their children in their wills, so many turn to 529 plans–tax-advantaged investment accounts that allow savers to select among various exchange-traded or mutual fund portfolios–for this task.
529 plans can provide many great advantages, including tax deductions and no penalty taxes on withdrawals used for qualified education expenses; however, it can be hard to predict how much a child needs for higher education expenses. Therefore, many families also set up Roth IRAs specifically designed for their child that can then be transferred over to a 529 plan later on.
Before rolling over a 529, it’s crucial to be familiar with its rules on changing beneficiaries. For instance, account owners must wait 15 years before they can convert unused 529 funds into a Roth IRA.
How can I roll my 529 plan into a Roth IRA?
Starting in 2024, beneficiaries of 529 plans will have the ability to transfer any unused funds into a Roth IRA – providing another avenue for saving for college expenses.
While there may be restrictions attached to the rollover option, it represents an important step toward increasing flexibility of 529 plans and encouraging more families to invest in their child’s future.
Withdrawals from 529 plans may be used to pay for qualified higher education expenses, such as tuition; room and board; mandatory fees; books and supplies; computers/other equipment/transportation costs etc.
Keep in mind, however, that Roth IRAs come with income restrictions. Any rollover from a 529 into a Roth IRA must fall within 2024’s annual contribution limits (plus any actual traditional or Roth contributions made during that year) plus there is also a lifetime transfer limit of $35,000; further IRS guidance could alter these rules accordingly.
Can I roll my 529 plan into a Roth IRA after 2024?
2024 saw an important shift in law, enabling families to convert their 529 accounts to Roth IRAs; but with certain limitations.
This new rule permits up to $35,000 of assets held within 529 accounts to be transferred into Roth IRAs funded with after-tax dollars – an incredible change from prior regulations, under which any withdrawal would require payment of taxes and an additional 10% penalty, in addition to being subject to penalties when used for noneducational expenses.
Roth IRA accounts must be opened on behalf of the beneficiary who is receiving funds from a 529 account; this could be your child, spouse, brother/sister/niece/nephew or even yourself if planning on earning postgraduate degrees/certifications in future years. Additionally, each year contribution limits should not exceed $6500 for those under 50 and $8,000 for those over 50 respectively.
Can I roll my 529 plan into a Roth IRA after 2025?
Beginning in 2024, under the Secure 2.0 Act of 2022, 529 college savings accounts can roll over up to $35,000 of funds into Roth IRAs under their beneficiary’s name without incurring taxes or penalties – this new rule only applies for funds that have been in their plan for at least 15 years and haven’t yet been used.
Beneficiaries may also use their rolled over assets for nonqualified expenses, though any earnings on any withdrawals are subject to income tax and a 10% penalty. Beneficiaries may change beneficiaries at any time to someone who qualifies, or transfer it directly into an ABLE account (tax-advantaged savings plan for individuals with disabilities).
The new rules represent an expansion of 529 plans’ flexibility since 2017 tax law broadened their tax benefits to cover K-12 tuition as well as postsecondary studies. Yet many questions remain, including how these rules will be implemented by the IRS and whether changing beneficiaries triggers a 15-year holding period.
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