Category: 529 Plan

You may be able to do this utilizing any unused funds in the student’s 529 Plan. The IRS now allows rollovers of these funds to a Roth IRA in the child’s name.

REQUIREMENTS

You must have owned the 529 account for at least 15 years before rollovers are allowed. Contributions made in the five years before distributions start — including the associated earnings — are ineligible for a tax-free rollover. Rollovers can’t exceed the 2024 annual Roth contribution limit ($7,000/$8,000 for ages 50 and older).

The lifetime 529 rollover limit is $35,000, so you’d have to do a rollover annually for several years. As the owner of the Roth IRA, your graduate must have earned income at least equal to the amount of the annual rollover.

THE MILLIONAIRE PART

Look at the hypothetical example (chart) of making rollovers of $35,000 in remaining funds over five years. It assumes the annual contribution limit remains $7,000, your child makes no additional contributions, and the IRA earns a hypothetical 7% compounded interest monthly for 45 years. Consult your tax advisor about your situation.

Starting in 2024, 529 educational savings plans will become even more attractive with enhanced tax benefits. If your student receives scholarships or joins the military, there is a new option for handling excess 529 plan funds.

SECURE 2.0

The SECURE Act 2.0, which became law late in 2022, enables 529 beneficiaries to place unused 529 funds into their Roth IRA – without penalty. Understand that the rollover can only be made to the 529 beneficiary’s Roth IRA – not a parent’s Roth IRA.

This new rule can have an incredible impact on the student’s ability to successfully fund a comfortable retirement, thanks to the power of compound interest.

OTHER OPTIONS

You still have the option of changing a 529 plan beneficiary to another qualifying family member. But the funds would have to be used for educational purposes. Alternatively, you could withdraw excess funds and pay a 10% penalty.

OBEY THE RULES

As with most tax laws, numerous rules govern a 529 plan to Roth IRA rollover. Keep these in mind:

• A max of $35,000 can be rolled over from a 529 plan to a beneficiary’s Roth IRA.
• Annual Roth IRA contribution limits apply to rollovers. (For example, if this law was already in effect, the 2023 ROTH IRA contribution limit is $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA).
• Conversions can only be made to a beneficiary’s Roth IRA; a parent saving with a 529 plan in a child’s name cannot convert unused funds back into their own retirement account.
• Rollovers are not allowed until a 529 account has been open for at least 15 years.
• Funds you convert from 529 plans to Roth IRAs must have been in the account for at least five years.

Consult your tax professional to learn more.