Can You Rollover a 529 Into an IRA?
Saving for college education can be an essential financial goal, but what happens if your child doesn’t attend or you have excess funds left over? Thanks to Secure Act 2.0’s new provisions, families now have an option of rolling over any unutilized 529 investments into Roth IRAs and keeping those investments tax-deferred until use.
Taxes on rollovers
Tax rules surrounding 529 rollovers can be complex and vary by state, requiring professional guidance from financial planners and tax advisors in order to effectively help families save money and protect any valuable investments from being lost or recaptured through deductions. Although 529 rollovers may help save families money, any changes should be undertaken with caution and under guidance from both professionals so as to prevent losing any valuable investments that might otherwise have been lost due to improper procedures. Additionally, consideration should also be given for state income taxes and recapture of deductions that might need to be addressed as well.
A 529 plan can be an excellent way to save for college expenses. Investment earnings on account contributions are exempt from federal income tax, while withdrawals from your account can be used to cover qualified education expenses like tuition at public or private colleges and universities, room and board, fees, miscellaneous costs associated with higher education as well as miscellaneous costs that arise during enrollment.
Margo decides to convert her 529 account into a Roth IRA, with up to $35,000 tax-free transfer allowed in total; however, in order to take full advantage of its tax advantages over five years.
Restrictions on rollovers
The SECURE 2.0 Act permits college savers to switch their 529 accounts over to Roth IRAs under certain conditions, provided at least 15 years has passed since opening them and they designate it as such in their new accounts.
Parents using 529 plans to save for their child’s college education no longer face an important drawback: any funds saved that were not subsequently spent would become subject to taxes and penalties.
This new rule makes it simpler to change the beneficiary of a 529 account if your child decides against going to college or you change your mind about their choices for higher education. Simply transfer funds within that plan or change account owners; but keep in mind you can only make one tax-free rollover per beneficiary per 12-month period.
As 2019 begins, families with unutilized 529 college savings plans can transfer their funds into retirement accounts without incurring taxes or penalties thanks to a provision in the SECURE Act 2.0 passed by Congress in late 2022 and going into effect in 2024.
Law allows families to transfer up to $35,000 of unused 529 account investments into Roth IRAs; however, only earnings may be moved over. Transfer must take place under the beneficiary’s name and may only include investment earnings earned over the past five years.
Law requires a 15-year waiting period before moving funds between accounts, with rollover taking place within beneficiary lifetime limits (currently set at $6500 this year) to make this transition feasible for families saving for both education and retirement savings. But even with these restrictions in place, families could enjoy greater flexibility when saving for both purposes simultaneously.
Taxes on withdrawals
As 529 rollover or transfer can have significant tax repercussions, it is wise to consult a CPA or fiduciary financial advisor when considering such action. You should also inquire as to whether your new state offers tax deductions for contributions; if so, withdrawals made for nonqualified expenses could be subject to clawback penalties.
Withdrawals from 529 accounts can often be free from federal income taxes when used for qualified education expenses; otherwise they’re subject to income taxes and a 10% penalty. Converting your 529 into a Roth IRA allows the investment earnings to continue growing tax-free while future retirement withdrawals will also remain tax-free – providing another alternative way of tax-free savings growth and withdrawals in retirement. While the process is often complex, rollover is one option available to avoid taxing unclaimed college savings accounts; factors that might influence this decision include: