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I Can Roll Leftover 529 Plan Funds to a Roth IRA?

The Secure Act 2.0 made some new changes to retirement rules, such as increasing the age to take required distributions and allowing employers to make matching contributions to a retirement plan based on student loan payments.

Another change that was made is the ability to rollover funds from a 529 college savings plan into a Roth IRA. As usual, it's important to know the details before proceeding.

Taking a quick review, when parents (or anyone else) contribute money to a 529 college savings plan for a student, the earnings grow tax deferred. If the funds are withdrawn for qualified educational expenses, then they come out tax free. Qualified expenses can include tuition and fees, books and school supplies, student loan payments, computers and internet, to name a few.

A common question is what happens if my child does not go to college or if there are leftover funds in the 529 Plan? In this case, the earnings (not your original contributions) that is not used for qualified educational expenses will likely be taxed as ordinary income and in addition there may be a 10% tax penalty. In this situation brace for a tax hit that comes from cashing out and putting the money elsewhere.

New 529 rollover option

In an effort to help in situations where families have extra funds in an account, Congress created a new rollover option.

Starting in 2024, beneficiaries of a 529 plan can roll up to $35,000 to a Roth IRA over their lifetimes. The rollover is not subject to taxes or a penalty that would normally apply to non-qualified use of funds. This new rollover option can give a young adult a head start on retirement savings.

Here's the details:

  • The beneficiary of the 529 plan must be the owner of the Roth IRA.

  • Any rollover is subject to annual Roth IRA contribution limits, so unfortunately, a beneficiary cannot roll over $35,000 all at once, it would need to be spread over a period of years. For example, in 2024, the Roth IRA contribution limit is $7,000 (for people under age 50) or earned income, whichever is less. This means a beneficiary would be able to roll over up to $7000. Unless the beneficiary only earned $4,000 in total income in 2024, then the maximum amount that could be rolled over is $4,000. Repeat this process each year, making sure to follow the annual contribution rules.

  • Also, the 529 plan must be open for at least 15 years.

  • If the 529 account owner (usually a parent) changes the beneficiary of the 529 plan at any point, this will restart the 15-year clock.

  • Contributions to a 529 plan made within five years of the rollover date can't be rolled over, only 529 contributions made outside of the five-year window can be rolled.

Although the process of rolling funds from a 529 plan to a Roth IRA may seem complex, it is worth the effort if it applies to you. When you have a chance like this to get funds inside of a Roth IRA, it is usually worth it.

If you need help, you can reach me by clicking on the contact tab at the top.

John Piershale, CFP®, AEP®

A Fee-Only and Fiduciary Advisor

John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned. The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.


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