529 to Roth: For Lifelong Support
At Yeske Buie, we’re always searching for creative strategies to guide our Clients through life’s inevitable financial complexities. For parents and guardians, questions around supporting their child’s successful financial future are often top of mind, and rightfully so. In this vein, we take a deeper look at a Secure Act 2.0 provision that became effective which allows rollovers of a limited, unused portion of 529 college savings plans into Roth IRA accounts in the name of the 529 beneficiary.
In previous years, the funds from a 529 savings account must have been used for qualified educational expenses in order avoid taxation and the 10% penalty. This new rollover rule now allows those funds to continue to grow tax free for the beneficiary while avoiding the 10% penalty.
However, there are several stipulations to this rule:
- Funds must be rolled into Roth IRA in the name of the 529 account beneficiary.
- Contribution Limits (Annual/Lifetime)
- Annual IRA contribution limits apply to the rollover amount ($7,000 in 2024). Additionally, the beneficiary receiving the funds must have W-2 income equal to the amount being rolled into a Roth IRA. If a rollover from the 529 to a Roth occurs up to the annual limit, the IRA account owner will no longer be able to contribute any amount to their traditional IRA for that year.
- There is a lifetime rollover maximum of $35,000. Given this year’s annual maximum contribution of $7,000, the 529 account owner could rollover $7,000 into the beneficiary’s Roth IRA every year for 5 years.
- While those with hundreds of thousands of dollars in a 529 account get some unused funds out of the account, the effectiveness of the rollover phases out once the balance of the account exceeds the $35,000 ceiling.
- 15-Year Holding Period
- The 529 account must have been open for at least 15 years.
- Contributions and earnings made in the last five years are ineligible for the rollover.
*It is unclear as to whether or not the 15-year window applies to the account’s date of inception or to the length of time the beneficiary was named on the account.
While the rules limit the amount that may be rolled over, this new rule still provides an opportunity to help jump start your child/student’s retirement savings with tax-free dollars.
There are also other options to address the unused funds in a 529 savings account:
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- Change the beneficiary of the account to another qualifying family member.
- Keep the funds in the account to help pay for graduate school or education.
- Set aside up to $10,000 to pay off student loans carried by the beneficiary or another qualifying family member.
To find out more on the 529-Roth-rollover, see the resources below. And as always, if you have a 529 account with unused funds, reach out – we’re great people to think with!