Rollover a 529 Into an IRA

Your 529 account offers you more flexibility than many other savings accounts: It can grow tax-free until it needs to be used for qualified education expenses.

Frerichs advises before investing in 529 plans, consumers should reduce debt and set aside 15% of their income in retirement accounts.

What is a 529 plan?

A 529 plan is a college savings plan that allows families to save tax-deferred for higher education expenses for their children, including state income tax deductions in 35 states and various investment options that help your money grow.

However, 529 accounts can have one significant caveat: If a beneficiary withdraws funds for anything other than educational expenses they face a 10% federal penalty and income taxes on earnings. To avoid this complication families can change the beneficiary to another eligible family member or even themselves depending on plan rules.

Thanks to recent legislation, this option has now become even simpler. Under Secure Act 2.0, unutilized 529 funds may now be transferred directly into a Roth IRA for their beneficiary without incurring penalties or tax consequences; making 529s even more powerful savings vehicles for families.

How do I open a 529 plan?

Your state may offer 529 plans or you can open one through private brokers, investment companies or even your own brokerage firm. Whoever opens an account (known as an account owner ) controls how the money in their 529 is managed. Anyone may make contributions, though often parents or grandparents set them up on behalf of children.

An attractive benefit of 529 plans is that investment earnings don’t incur taxes when used towards qualifying education expenses such as tuition fees, room and board and books. However, any withdrawal made outside the context of qualified educational expenses could incur taxes as well as a 10% penalty fee.

Recent changes are making 529 plans an even easier tool for college savings. Beginning in 2024, families can roll over up to $35,000 from a 529 plan into a Roth IRA for the beneficiary without incurring taxes or penalties; this provision represents an invaluable opportunity for families struggling to put away enough for higher education costs.

How do I fund a 529 plan?

Experts advise beginning early and saving regularly to get the most from a 529 plan. For instance, if your goal is a third of future college costs and haven’t reached the total contribution limit ($250,000), consider beginning with an automatic monthly contribution of $250 and gradually increase it as your income rises.

Contributions to a 529 aren’t tax deductible, but withdrawals may be free from federal taxes as long as they’re used to pay qualified education expenses like tuition fees, room and board, books and so forth. If funds are withdrawn for other uses they could incur income tax as well as a 10-percent penalty on investment earnings.

Starting in 2024, beneficiaries can move funds not used from their 529 account into a Roth IRA for retirement savings – potentially giving a headstart on saving.

How do I rollover a 529 plan?

As soon as your child graduates from college or doesn’t enroll, and leaves a 529 account behind, you may wish to transfer its balance into an IRA account without incurring taxes and penalties. Now, with the SECURE 2.0 Act’s new rule allowing beneficiaries to transfer 529 money directly into Roth IRA accounts from 2024 forward, this will become possible.

Only the unused portion of 529 accounts is eligible to be moved over, which typically amounts to about $35,000 per beneficiary depending on how much has already been invested in that account. Annual contribution limits still apply as well.

Imagine Carol is a high school student who decides to follow her passion as a freelance graphic designer instead of attending traditional college or vocational school. In such an instance, Carol’s parents could use the assets in her 529 plan to fund a Roth IRA for her, provided she meets other requirements.


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