Can You Rollover a 529 Into an IRA?
If you began saving for your child’s college education as soon as he or she was born and they graduate college with plenty of funds left in a 529 plan, new rules beginning in 2024 may allow you to move it over into a Roth IRA with certain restrictions and conditions attached.
First, your account must be 15 years old; nonqualified withdrawals (for noneducation expenses) are taxable and subject to a 10% penalty tax.
What is a 529 Plan?
A 529 plan is an education savings account that allows you to set aside money for qualified education expenses. Administered by states, these accounts offer numerous investment options so you can set one up for yourself or someone else if college costs become a burden.
529 plans allow you to access funds tax-free if used to cover qualified education expenses such as tuition and fees, room and board, books, supplies and computer equipment for qualifying educational institutions or vocational training expenses.
If you withdraw money from a 529 plan without using it for education purposes, the federal penalty and income taxes could apply. One way to avoid that penalty would be transferring the funds into a Roth IRA; however, its rules vary and so it’s essential that you consult your financial advisor or custodian beforehand in order to make an informed decision. Thrivent advisors are here to help guide your efforts so you make sound choices.
Who Can Open a 529 Plan?
Under current tax laws, anyone can open and contribute money to a 529 plan; however, only its owner has access to making investment decisions or changing beneficiary designation. When opening their plan they are typically given several investment options and set an age-based strategy which automatically adjusts portfolio based on when college attendance will occur.
If the funds from a 529 plan are used to pay for qualified education expenses, no federal income tax is owed on distributions and earnings from them – an important advantage when saving for education.
A new provision in law allows you to roll unused 529 assets up to $35,000 into their beneficiary’s Roth IRA. This may prove helpful for those worried that excess 529 funds might become surplus if their beneficiary decides not to attend college or selects a lower-cost school; it remains to be seen how the IRS interprets this rule or whether states impose penalties for 529-to-Roth rollovers.
How Can I Open a 529 Plan?
Anyone can open a 529 plan and designate anyone (such as their child or other family member) as the beneficiary. There are options for state-administered plans as well as broker-administered ones ranging from low cost plans to high fee funds; all you need to be eligible to open an account in the US is having a Social Security number and resident.
Keep this in mind when using 529 plans for nonqualified expenses: the earnings portion could incur income tax and possibly a 10% federal penalty. Therefore, experts advise using an age-based strategy that maintains an appropriate mix of assets based on when your beneficiary will start college and gradually reduces risk as this date approaches.
If your beneficiary completes school and there’s money still sitting in a 529 plan after graduating, they may be eligible to convert that account to a Roth IRA; but subject to certain limits (annual contribution limit for Roth IRA and 15-year requirement of 529 account).
Can I Roll Over a 529 Plan?
If your child decides not to attend college or selects an institution that doesn’t fit within your budget, there are still ways you can utilize their 529 plan funds. You could change their beneficiary status to someone younger or yourself and use it towards eligible education expenses; however, a 10% penalty tax and federal income taxes would need to be paid on any earnings made before converting it to a Roth IRA that allows access without penalties or taxes being assessed on withdrawal.
The new law that came into force in 2024 allows you to roll unused 529 assets into a Roth IRA up to the lifetime maximum limit of $35,000. Note, however, that any rollover must occur plan-to-plan or trustee-to-trustee instead of directly through checks distributed directly. Roth IRA contribution limits must also be observed and transfers made before your beneficiary reaches 55 years old.