Education Cost Planning

529 to Roth Rollovers

Apr 4, 2024
Brian Short
Senior Wealth Advisor

In December 2022, Congress passed the SECURE 2.0 Act, which introduced new rules relating to 529 plans that have taken effect in 2024. Plan beneficiaries can now roll over up to $35,000 of unused 529 assets to a Roth IRA over their lifetimes, which is not subject to the taxation or penalty that would typically apply to a non-education use of funds. This development could extend the utility of these savings accounts beyond college tuition and allow a young adult to get a head start on retirement savings. It also introduces a new dimension to financial planning with 529s, provided the rules and limitations are navigated appropriately.

Before visions of Roth IRAs funded by 529 plans dance in your head, it is crucial to understand the rules:

  • The beneficiary of the 529 plan must be the owner of the Roth IRA.
  • The 529 plan must be open for at least 15 years to qualify for a rollover. Contributions within the last five years and their associated earnings are ineligible.
  • Rollovers are subject to annual Roth IRA contribution limits, currently $7,000 in 2024, meaning full utilization of the $35,000 limit must be spread over multiple years. In addition, 529 rollovers count towards the annual contribution limit when making a standard Roth IRA contribution.
  • The beneficiary must have earned income equal to or exceeding the rollover amount. However, the normal Modified Adjusted Gross Income limits for Roth IRA contributions are waived for 529 rollovers.

Other things to consider:

  • With the SECURE 2.0 Act’s details still crystallizing, particularly related to 529 beneficiary changes and whether that starts a new 15-year holding period, making significant changes to your 529 strategy may be premature.
  • When opening new 529 accounts for your children or grandchildren, consider their individual needs, and do not assume you will be able to roll these assets to a Roth IRA until the IRS provides clarity.
  • Independent of 529 plans, contributing to a Roth IRA for a child or young adult with earned income remains an efficient savings strategy.
  • Remember, 529 plans already offer flexibility, including changing beneficiaries, using funds for K-12 tuition and other expenses (up to $10,000 per year), paying down student loans (up to $10,000), and withdrawing scholarship-equivalent amounts of your principal contributions without penalty.

As we move through 2024 and beyond, the option to roll over 529 assets into a Roth IRA adds a layer of flexibility to the already valuable 529 plan. While it may not revolutionize retirement saving, it enriches the conversation around saving for both education and retirement, emphasizing the importance of adaptable and thoughtful financial planning.

There are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Most states offering their own 529 plans may provide advantages and benefits exclusively for their residents and taxpayers, including financial aid, scholarship funds, and protection from creditors. Before investing in a 529 plan, consider the investment objectives, risks, charges, and expenses available in the issuer’s official statement, which should be read carefully. The official disclosure statements and applicable prospectuses containing this and other information about the investment options, underlying investments, and investment companies can be obtained by contacting your financial professional.