Do You Have Leftover 529 Funds?
As the year ends, don’t miss out on converting a 529 plan to a Roth IRA. Thanks to a provision in the SECURE Act 2.0, individuals will be allowed to roll over unused 529 plan funds into a Roth IRA starting this year, 2024. The conversion can be a tax-advantaged strategy for families who find they have leftover 529 funds after covering education expenses.
Here’s a breakdown of how it works:
- TIME REQUIREMENTS:
- The 529 account must be open for at least 15 years before any rollovers to a Roth IRA can occur.
- Contributions (and their earnings) made in the last five years are ineligible for transfer.
- LIFETIME LIMITS:
- A lifetime maximum of $35,000 can be rolled over from a 529 to a Roth IRA for each beneficiary.
- CONTRIBUTIONS LIMITS:
- Annual rollovers are subject to regular Roth IRA contribution limits. For instance, in 2024, the yearly limit is $6,500 (or $7,500 if the account holder is 50 or older). So, you can only roll over up to the annual limit each year, even if your 529 has enough funds for a larger transfer.
- BENEFICIARY ALIGNMENT:
- The rollover must go into a Roth IRA in the name of the 529 plan beneficiary. However, the 529 beneficiary can often be changed, so there’s some flexibility if the original beneficiary doesn’t need the funds.
BENEFITS OF THE 529-TO-ROTH CONVERSIONS
- Avoiding penalties:
- A 529 used for non-education purposes typically incurs a 10% penalty and taxes on earnings. This rollover option avoids those penalties.
- Retirement Savings Opportunity:
- This allows families to turn unused education savings into retirement savings for their beneficiaries, especially useful if the funds weren’t needed for college.
PLANNING CONSIDERATIONS
This option can be beneficial if you have younger children or anticipate leftover funds. However, careful planning is essential, as funds contributed within five years of the conversion will not be eligible, and any rollovers must comply with contribution limits.
If you are considering this approach, it may be wise to consult a financial advisor to maximize the potential benefits and avoid unintended consequences.