New Savings Opportunity – Converting a 529 Plan to Roth IRA

Recent changes implemented by Secure Act 2.0 provide a powerful retirement opportunity.

Starting in 2024, Congress changed the way that 529 accounts work. A 529 account is made with a beneficiary (future student) in mind and is used for educational expenses such as tuition, books, room and board, and other qualified expenses. These 529 accounts are tax-advantaged investment accounts and withdrawals used for the designated qualified educational expenses are exempt from federal and state income taxes.

Traditionally, after a beneficiary completed their education, the money remaining in these 529 accounts could not be used for non-education purposes without paying a tax penalty of 10%.  However, a person was permitted to transfer the 529 account to another eligible beneficiary with educational expenses as a way to maintain the tax advantaged status of the account.

With the enactment of the new legislation, 529 funds can now be rolled over into to a Roth IRA for the beneficiary, allowing more flexible options to put money towards retirement without being restricted by traditional 529 tax penalties.

For a 529 account to rollover funds to a Roth IRA there are several important criteria that must be met:

1. The 529 account must exist for at least 15 years for a designated beneficiary;
2. The amount to be rolled over from the 529 to the Roth IRA must be in the 529 for at last five years;
3. The funds are directly moved from the 529 to a Roth IRA, which will be maintained for the designated beneficiary;
4. The amount rolled over from the 529 does not exceed the annual contribution limitations of a Roth IRA;
5. The total aggregate amount distributed from the 529 to a Roth IRA cannot exceed $35,000.

It is important to remember that contributions are subject to a total limit of $35,000, and that once that amount is rolled over, no further funds can be moved to the Roth IRA from the 529. Clients should consult with their advisors to determine if converting a 529 plan would be appropriate.

While rolling over funds from a 529 account has some limitations, it offers an alternative to the traditional options of 529 funds, and allows a person to jumpstart a beneficiary’s retirement account after a beneficiary completes their education.

See the IRS link below for some additional information

Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service (irs.gov)