Can You Rollover a 529 Into an IRA?

Saving for college education can be a top priority for many families. But what happens if the beneficiary decides not to attend or needs additional retirement savings?

Beginning in 2024, beneficiaries have the option of rolling over any remaining 529 funds into a Roth IRA – but there may be restrictions and rules they need to keep in mind first.

Taxes

An Individual Retirement Account, or IRA, is a tax-advantaged retirement savings account that allows you to invest in stocks and mutual funds tax-free. An IRA can be opened with banks, financial institutions, discount brokers or with the assistance of Guardian Financial Professionals who will explain its advantages quickly and help set it up easily.

Anyone with earned income can make contributions to an IRA, an individual retirement arrangement. Each year, the IRS sets contribution limits. Contributions can be made via transfers from your bank account or mailing a check directly.

At age 59 1/2, withdrawals can generally begin without penalty from an IRA; however, any money taken out prior may incur an early withdrawal penalty of 10% in addition to regular income taxes.

Investments

Under the provisions of the SECURE Act, beneficiaries can rollover up to $35,000 of 529 plan assets into their Roth IRA within five tax years of having invested them in a 529 plan. However, it should be noted that these rules only apply if funds have been held within that 529 for at least five tax years before being moved over into an IRA account.

As well, the beneficiary must own both a traditional or Roth IRA in his/her name; additionally, annual contribution limits (which in 2024 stands at $7,000 or $8000 for people over 50) apply when rolling money into an IRA.

Families may benefit from this new rule if their child doesn’t attend college as expected, receives scholarships or tuition costs are less than anticipated. Before making any decisions based on these new regulations it is wise to consult a financial planner or tax professional so they can help guide your decisions appropriately and explain how the changes impact their particular circumstances.

Distributions

The new law permits holders of 529 accounts to rollover any unused funds into Roth IRAs, providing young adults a method for saving for retirement in decades to come. There may be certain qualification and tax implications related to this new option that should be carefully considered before choosing this path.

Rollover eligibility requires that the beneficiary possess earned income during the year of distribution, whether from wages, self-employment, or any other source. If they don’t, they’ll need to wait until tax filing season before initiating a rollover.

At present, the IRS is still considering all of the details surrounding its new legislation and it remains uncertain if a change in beneficiaries will alter this requirement or not. As such, industry players await further guidance from them regarding these questions.

Beneficiaries

Custodians of 529 accounts are called custodians; those who use their funds for college expenses, known as beneficiaries. While these roles usually are different individuals, in some instances a parent might open an account on behalf of their child but name themselves both custodian and beneficiary in order to meet federal regulation guidelines.

Starting in 2024, unutilized assets from 529 plans may be transferred directly into an individual Roth IRA owned by their beneficiary – making retirement savings a priority among young people.

Rollover options do come with some restrictions, however. Beneficiaries must be at least 21 years old, and amounts rolled over cannot exceed the annual contribution limits set out in an IRA account. Before making any changes to your accounts it is advisable to consult a financial expert first.


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