Can You Rollover a 529 Into an IRA?

Can you rollover a 529 into an IRA

Many families use 529 plans as an effective means of saving for college, with tax benefits including earnings that are exempt from federal income tax if used towards qualified educational expenses.

Beginning in 2024, 529 plan assets can be transferred tax-free into a Roth IRA for their beneficiaries – however there may be restrictions and restrictions.

Taxes

Usually, withdrawals from 529 plans that do not qualify as qualified expenses would incur income-tax rates and potentially incur a 10% federal penalty. But thanks to recent legislative change, you now have an option of rolling over unutilized funds from 529s into Roth IRAs without incurring taxes or penalties; thanks to the SECURE 2.0 Act. But there are certain restrictions: the account owner must own their 529 for at least 15 years before making such a rollover; contributions or earnings made within five years cannot be included as eligible candidates for rollover.

This change in law offers grandparents a new option for investing their grandchildren’s 529 savings accounts, but may require consulting a financial planner in order to understand all of its rules and requirements for rolling over an account’s beneficiary and restarting its 15-year holding period.

Withdrawals

No matter the nature of your 529 account or any changes that might be necessary in the future, it’s crucial that you are informed of its regulations in order to avoid penalties and taxes.

Withdrawals from 529s are not subject to federal or many state taxes when used for qualified expenses such as tuition and room and board; however, withdrawals made for any other use will incur federal income tax plus an additional 10% penalty, unless qualifying for the kiddie tax exemption.

One possible option for those with leftover funds is changing the beneficiary and rolling it into a Roth IRA, subject to certain restrictions and requirements. You could also move it into an Education Savings Account provided certain criteria are fulfilled; should this happen, at least five years must pass before moving it back again.

Roth IRAs

Starting next year, beneficiaries who withdraw money from their 529 accounts not used for qualified education expenses are subject to income tax and a 10% penalty. Thanks to the SECURE 2.0 Act, however, they now have an alternative: moving their 529 funds into a Roth IRA provided certain conditions are met.

Under the new rules, an account owner can transfer up to $35,000 of unused 529 funds into a Roth IRA for their beneficiary without incurring federal income tax or penalties. However, contributions made within 15 years may incur tax penalties as well. State income taxes penalties could also apply; it’s important for beneficiaries to consider future qualified educational needs when making this decision; sometimes Roth IRA may be more suitable.

Rollovers

As can be seen, rolling over a 529 account into an IRA requires careful attention to every step. Therefore, it is always advisable to consult your wealth advisor and tax professional prior to undertaking such an endeavor.

The 2022 SECURE 2.0 Act now permits you to transfer up to $35,000 of unused 529 assets into a beneficiary’s Roth IRA without incurring penalties, but contributions and earnings made during the last 15 years of a 529 plan’s holding period do not qualify for transfer into such an account.

Roth IRA transfers will count toward your annual contribution limit, which could hamper future growth. Therefore, most experts advise using this strategy only as an emergency backup option. It should also be noted that funds rolled over cannot be used to fund nonqualified withdrawals.


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