529 to Roth IRA: A Smart Move for Your Savings?

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

You planned carefully, saved diligently, and now your child has leftover 529 funds. What’s next? For many parents, this can feel like a frustrating dilemma. But what if you could transform those unused education savings into a gift for their future? Thanks to recent changes in legislation, transferring unused 529 funds into a Roth IRA is now an option.

This guide will explain how this exciting opportunity works, its potential benefits, and what to consider before making the move. Whether you’re planning ahead or looking to repurpose existing savings, this strategy could give your finances a significant boost.

Key Takeaways

• A 529 plan can now be rolled over to a Roth IRA under specific conditions.
• Transfers are subject to annual Roth IRA contribution limits and a $35,000 lifetime cap.
• This option allows families to repurpose unused education savings for retirement.

What Is a 529 Plan?

A 529 plan is a tax-advantaged account designed to help save for education expenses. Funds grow tax-free, and withdrawals used for qualified expenses like tuition or books are not taxed.

Key Features:

• Tax-Free Growth: No taxes on earnings if used for education.
• Flexible Usage: Can cover K-12, college, or even up to $10,000 in student loan repayments.
• Account Control: You maintain control, even if the beneficiary changes.

Hypothetical Example: Sarah saved $50,000 in a 529 plan for her son’s education. After college expenses totaled $40,000, she had $10,000 left unused. Instead of incurring penalties, Sarah now has the option to transfer the leftover funds to her son’s Roth IRA.

Read our full article on 529 plans by clicking here.

What Is a Roth IRA?

A Roth IRA is a retirement account that allows contributions with after-tax dollars. The funds grow tax-free, and qualified withdrawals in retirement are also tax-free.

Key Features:

• Tax-Free Withdrawals: No taxes on withdrawals in retirement.
• Contribution Limits: $7,000 annually in 2024 (or $8,000 for those aged 50+). (Publication 590-A, page 2)
• Income Limits: Eligibility to contribute may phase out for high earners.

Hypothetical Example: Tom, a 35-year-old teacher, contributes $7,000 annually to his Roth IRA. By retirement, his investments have grown to $500,000, all tax-free.

529 to Roth IRA Transfers: How It Works

The SECURE Act 2.0, enacted in 2022, allows rollovers from a 529 plan to a Roth IRA starting in 2024. Here’s what you need to know:

Eligibility Criteria:

• Account Age: The 529 account must be open for at least 15 years.
• Beneficiary: The Roth IRA must be in the name of the 529 plan beneficiary.

Contribution Limits:

• Transfers count toward the annual Roth IRA limit ($7,000 in 2024).
• A lifetime rollover cap of $35,000 applies.
• Time Frame: Contributions made in the last five years are ineligible for rollover.

Steps to Transfer

1. Confirm the 529 account has been open for at least 15 years.
2. Verify that unused funds qualify for transfer.
3. Work with your 529 and Roth IRA providers to initiate the rollover.
4. Ensure transfers stay within annual and lifetime contribution limits.

Pros and Cons of 529 to Roth IRA Transfers

Pros:

• Repurpose Unused Funds: Avoid penalties on leftover 529 funds.
• Tax Advantages: Continue tax-free growth and benefit from tax-free retirement withdrawals.
• Retirement Boost: Helps beneficiaries kickstart their retirement savings.

Cons:

• Limited Transfers: Lifetime cap of $35,000 restricts the total amount transferred.
• Eligibility Rules: Account age and recent contributions may disqualify some funds.
• Education Trade-Off: Once funds are transferred, they cannot be used for education expenses.

FAQs

1. Can I transfer 529 funds to my own Roth IRA?

No, rollovers must go to the 529 beneficiary’s Roth IRA.

2. What happens if my 529 account is less than 15 years old?

You’ll need to wait until the account meets the 15-year requirement to qualify for a rollover.

3. Are there penalties for unused 529 funds?

Yes, unused funds not rolled over or spent on qualified expenses may face a 10% penalty on earnings.