Coming soon: 529 plan rollovers to Roth IRAs
Key takeaways
Tax- and penalty-free rollovers
Funds from a 529 college savings plan can be rolled to a Roth IRA in the child's name beginning Jan. 1, 2024.
Some restrictions
There’s a $35,000 lifetime limit, and only the Roth IRA contribution limit can be rolled over each year.
Roth IRA benefits
The money can continue to grow tax-free and be withdrawn tax-free as long as certain requirements are met.
Beginning in 2024, a 529 college savings plan owner can roll over up to $35,000 to a Roth IRA in the beneficiary’s name. It’s a provision in the SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 of 2022. It gives plan owners another option for money if the beneficiary doesn’t go to college, gets a scholarship, or if there’s money left over after they graduate. A Roth IRA rollover helps avoid taxes and the 10% penalty on earnings for non-qualified withdrawals1. Currently, a 529 plan owner can change the beneficiary on a plan to another child — relative, family friend, grandchild — even another adult.
Potential benefits of a 529 rollover to a Roth IRA
Rolling money from a 529 plan into a Roth IRA allows it to continue to grow tax-free and be withdrawn tax and penalty-free in retirement.1 (Contributions can be withdrawn at any time without taxes or penalties.) Plus, a rollover avoids the Roth IRA rule allowing only those with earned income up to a certain amount to contribute to one.
There are some rules to rolling over money from a 529 plan to a Roth IRA.
- The Roth IRA must be in the beneficiary’s name.
- The lifetime rollover limit is $35,000.
- Only the contribution limit for a Roth IRA can be rolled over each year. For example, using the 2023 limit of $6,500, it would take six years to complete the rollover.
- The beneficiary must have earned income that equals the amount to be rolled over. So in order to rollover the 2023 limit of $6,500, they must have $6,500 in earned income.
- The 529 plan must be open for 15 years.
- The money (earnings and contributions) that's being rolled over must have been in the plan for five years.
For clients who may be hesitant to open a 529 plan or concerned about what happens to the money if it's not used for college, the Roth IRA rollover option may be a benefit. This gives the flexibility to use the money for the beneficiary's financial future.
Learn more
Position CollegeBound 529 to build your practice
SECURE 2.0: A bipartisan effort to help retirement savers
Footnotes
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1
Contributions can be withdrawn tax-free at any time. Investment earnings can be withdrawn tax-free as long as the account has been open for at least five years and you're age 59½ or older, or the withdrawal is due to death, disability, or qualified first home purchase.
