Can I Roll a 529 Plan Into a Roth IRA?
While most parents use 529 plans to save for their children’s educational costs, some may find themselves with any unused funds in their accounts that remain. With the new rollover rule in effect, these unused funds can now be moved directly into a Roth IRA on behalf of the beneficiary, provided certain criteria are fulfilled.
An investment advisor can assist in assessing whether this option is suitable for you.
Taxes
Under a new rule, unused 529 assets may now be directly transferred into their beneficiaries’ Roth IRA without incurring income tax or the 10% federal penalty on investment earnings. This option was included in the SECURE 2.0 Act and takes effect in 2024.
To qualify for tax-free transfers, beneficiaries must have completed 15 years of contributions to their 529 account. Contributions made within five years may not qualify; additionally, earned income equal to or greater than that amount should also exist in order to complete the rollover.
Though the new rule provides greater flexibility for managing education savings accounts, it could have unintended repercussions for parents who change beneficiaries on accounts. Therefore, families must carefully research their state rules and seek professional advice before making changes to beneficiary names in their 529 accounts. Nonetheless, the rule’s implementation represents a major step in increasing incentives to save for college and may help families avoid paying both financial and emotional costs associated with any unclaimed 529s.
Withdrawals
At present, this option remains open for those with unused 529 funds who want to convert them into Roth IRAs; however, there are certain key considerations which need to be kept in mind.
Contributions and earnings made within 15 years (and their related earnings) do not qualify for tax-free rollover, and to do so successfully the beneficiary of the new Roth IRA must own it and possess earned income equal to or greater than what is being transferred over.
Though the SECURE Act rules can provide relief for families struggling to save for their child or grandchild’s education costs, it’s still wise to consult a financial expert prior to making this type of move. A financial professional will explain different options available for rolling over education savings accounts and assist you in making a decision that’s suitable for you and your family.
Rollovers
The new 529-to-Roth IRA rollover provision offers another means of saving for retirement, but its rules vary by state. Therefore, for best results it is advisable to seek advice from an accountant or financial specialist for extra guidance.
An individual in Maryland who already contributed funds through her parents to a 529 plan may not be eligible to roll-over their funds because their tax deduction has already been claimed in that state; additionally, federal law may treat any amount rolled over as taxable income by both governments.
Beneficiaries can only make one tax-free rollover per 12-month period due to holding periods for both 529 accounts and Roth IRAs being applied simultaneously. Also, for the rollover to be tax-free a beneficiary must also own both accounts; this requirement still holds even if their 529 hasn’t yet been depleted of its funds.
Changes to the 15-year rule
Although it is impossible to predict exactly how much future education expenses will cost, SECURE Act 2.0 legislation now makes it possible to put excess 529 plan funds to work by rolling them over into a Roth IRA account if necessary. Note however, that an existing 529 account must have existed for 15 years prior to any funds being transferred over.
The law also sets forth a lifetime limit of $35,000 per beneficiary when rolling over from 529 plans to Roth IRAs, although this amount may be further subject to IRS interpretation or will likely need further legislative or administrative direction.
No one knows whether the income limitations that govern Roth IRA contributions would also apply to 529-to-Roth rollovers; therefore, it may be wiser to wait until more clarity emerges before making your decision. As always, always consult your financial and tax professionals for advice tailored specifically to your situation. 2019 Fidelity Investments; All rights are reserved.
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