Can You Rollover a 529 Into an IRA?
Withdrawals from 529 plans may be made tax-free if they’re used to cover qualified education expenses; however, federal income taxes may apply to earnings withdrawn from nonqualified accounts.
The SECURE Act 2.0 includes a provision enabling beneficiaries of 529 plans to use excess funds to open Roth IRAs without incurring penalties, giving families more choice in whether to prioritize paying for education or strengthening retirement savings. This may give families greater flexibility between paying for education costs or investing in savings for retirement purposes.
529 plans now offer account holders the ability to roll unused funds over into an IRA. This feature can help families avoid taxes and penalties associated with non-education withdrawals from their accounts.
Experts note that this change makes 529 accounts more appealing for those already holding one or more, though families should seek professional guidance regarding which expenses qualify as qualified college costs and when to use these savings plans.
Most states provide state-sponsored plans with high contribution limits. You can also open a national plan that invests your contributions across a range of investment options like stocks and bonds. When opening such plans, however, one expert emphasizes the importance of designating a beneficiary – otherwise changing this person could trigger gift tax ramifications – who shares your goals for funding education. Many age-based investments reallocate automatically over time which can help increase returns over time.
Beneficiaries may withdraw funds without incurring tax or penalty in certain instances; this typically applies when they can no longer use them for education expenses – for instance if their beneficiary dies, becomes disabled, attends an academy affiliated with U.S. military academies, or wins a scholarship.
Even if you do not wish to undertake a rollover, the funds can still be kept and changed to someone else as beneficiary; such as spouses, children, first cousins, descendants or siblings. Beneficiaries could even use the funds for graduate school tuition costs, law school studies or accounting studies or master’s degrees.
Starting in 2024, under certain conditions, the SECURE 2.0 Act offers you an advantageous way of rolling over unused 529 assets of up to $35,000 per beneficiary into a Roth IRA without incurring taxes and penalties – an attractive option for families that overfunded their college savings plans.
As long as withdrawals from a 529 account are used to cover qualified educational expenses, their withdrawals won’t be taxed – which can come in handy should your child decide against attending college or choose military service instead. However, you’ll owe income taxes plus an additional 10-percent penalty fee on earnings if withdrawing funds for any other reason than qualifying expenses.
Beginning in 2024, the SECURE 2.0 Act will enable you to convert any unused 529 money to a Roth IRA. To do this, a trustee-to-trustee transfer between accounts must occur – be sure to follow your provider’s instructions when conducting this transfer and keep records in case an audit arises.
Savers who find it hard to use all their 529 funds may find this change beneficial; however, savvy investors may wish to purposefully overfund their 529 plans with the aim of eventually rolling over any excess into tax-free Roth IRAs for themselves or family members.
A 529 plan requires a custodian who oversees its assets; typically this person will be either the parent of the beneficiary, but anyone can serve. They manage the account and can make changes to name, birthdate and Social Security number of beneficiaries as needed. Most plans also offer age-based portfolios which invest more aggressively when beneficiaries are younger while shifting more conservative investments as they near college age.
New rules allow families to roll unused funds from a 529 into a Roth IRA without incurring taxes or penalties, provided it happens within 15 years after opening the original 529 account. Otherwise, any amounts transferred become taxable income and trigger the 10% penalty tax for nonqualified withdrawals. Carter McClung believes this rule could be especially valuable to families that use 529s as part of an overall savings strategy; additionally it’s something worth keeping in mind if their beneficiary opts not to attend college or receives scholarships, according to him.