Rolling a 529 into a Roth IRA

Saving for your kid’s college can be a daunting task. In recent years, 529 savings plans have become a popular tool for saving for college in a tax-efficient way. One concern, however, is you may not be sure how much to save into a 529 because you don’t want to end up with unused money in those accounts if your child doesn’t use all the funds, gets a scholarship or maybe doesn’t end up going to college at all.

A new tax law that was passed in 2022 called the SECURE 2.0 Act provides some new flexibility with 529 plans (effective in 2024) where unused funds can be rolled into a Roth IRA for the beneficiary of the 529. This may change your outlook on how you save in your child’s 529 now that there is a much better “fallback plan.”

Here is what you need to know about the new 529-to-Roth rollover provision:

  • The 529 plan has to have been established at least 15 years ago in order to be eligible to move funds from the 529 to a Roth IRA. (You can’t just open a 529, put money in it and roll it into a Roth.)

  • The amount contributed to the Roth IRA each year cannot exceed the annual IRA contribution limit, up to a lifetime limit of $35,000.

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

  • The beneficiary must have earned income.

  • The beneficiary is not subject to income limitations to be eligible to contribute to the Roth IRA using 529 plan funds.

  • Contributions made within the past five years are not eligible to be rolled over to the Roth IRA.

If you prefer other options for the leftover 529 balance, there are still alternatives, such as transferring the account to other family members, paying for graduate school, using up to $10,000 to pay student loan debt, etc.

There are many things to consider when applying this new provision to ensure you do not cause a taxable event by mistake. If you have any questions or need assistance with your child’s 529 plan, please don’t hesitate to reach out to our team.