Can You Rollover a 529 Into an IRA?
A 529 plan provides parents and grandparents an efficient means of saving for a college education for their child or grandchild, tax-deferred contributions can accrue, while withdrawals for qualified educational expenses remain tax-free.
As of 2024, new rules will allow account owners to roll any leftover funds into a Roth IRA, but it’s essential that they fully comprehend all the details involved.
What is a 529?
A 529 savings plan is a tax-advantaged savings vehicle designed to help families save for education expenses. Contributions are tax deductible at both federal and state levels; withdrawals used for qualified education expenses are tax free as well. There may also be state income tax advantages related to these accounts that vary by state.
Anyone can create a 529 plan, although most 529s are set up by parents or grandparents on behalf of a child or grandchild. They can benefit from tax deductions available in their state while choosing investments with multiple stock and bond options for optimal returns.
These plans can also help save for graduate degrees or trade school programs; however, any withdrawals for non-qualified expenses will incur taxes and a 10% penalty from the federal government.
How can I rollover my 529?
As its name implies, a 529 college savings plan is a tax-advantaged investment account. Funds in it may be withdrawn without incurring federal income tax penalties if used towards qualified education expenses such as tuition, fees, room and board, books or equipment.
But what happens if a beneficiary doesn’t use all the funds they set aside? Prior to recently, they would have had to pay taxes and a 10% penalty on those funds which remained unspent.
Now, the SECURE 2.0 Act offers beneficiaries the ability to convert any unused 529 assets to Roth IRAs up to the lifetime maximum limit of $35,000 with certain restrictions and conditions in mind.
First and foremost, any rollover must take place directly between a 529 plan and an IRA, rather than in reverse. Furthermore, the beneficiary must own both accounts while transfer amounts must fall within annual contribution limits for both. Finally, income must have been earned during the year in which funds were transferred.
Can I rollover my 529 to a Roth IRA?
A 529 account allows you to set aside tax-free money for educational savings accounts for your children, but it isn’t the only way you can set money aside for their education. Roth IRAs or ABLE accounts could also provide ways for saving for educational needs within your family.
Secure Act 2.0 makes the process more streamlined, beginning in 2024 it allows you to convert unused funds from 529 plans into Roth IRAs for their beneficiaries.
This can be an attractive option for parents who have been saving for college tuition costs for their child, but now realize they may not require that amount for school expenses.
Keep in mind, however, that any funds left over from a 529 can only ever be moved once into an IRA owned by the beneficiary of that 529 plan and that their combined total cannot exceed the contribution limit for that year (minus any contributions made directly by them).
Can I rollover my 529 to a traditional IRA?
Tax law changes recently provide savers with new options when it comes to their 529 accounts. One new law allows savers to transfer unused funds in their 529 into a Roth IRA, provided certain criteria are met. It is advisable to first consult with an expert regarding your particular circumstances prior to taking any actions.
Specific criteria require that an IRA be in the same name as its beneficiary in order to meet these rules. Furthermore, both accounts must have been open for at least 15 years; any funds withdrawn prior to age 59 1/2 must pay taxes and a 10% penalty fee.
Additionally, the rollover must be direct (from plan-to-plan or trustee-to-trustee), not regular distribution with checks from a 529 account. Furthermore, an IRA must be set up as a Roth IRA with income restrictions applied so as to accept contributions into it from beneficiaries.
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