529 plan rollovers to a Roth IRA coming soon
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The money can continue to grow tax-free and be withdrawn tax-free as long as certain requirements are met.
A 529 qualified education savings plan is a tax-advantaged way to save for future education costs. Investors open an account for a beneficiary by putting in after tax money and the earnings grow free from federal income tax as long as they are used for a qualified higher educational expense in the future. But what if a child does not go to college or there is money left over after a child graduates? For withdrawals from a 529 plan that aren’t used for education, any earnings are subject to taxes and a 10% penalty.
Currently, a 529 plan owner can change the beneficiary on a plan to another child — relative, family friend, grandchild — even another adult. In 2024, there’ll be another option for the money — the ability to roll it over to a Roth IRA in the child’s name.
Potential Benefits of a 529 rollover to a Roth IRA
A Roth IRA can give a child a head start on saving for retirement. Rolling money from a 529 plan into a Roth IRA allows it to continue to grow tax-free and be withdrawn tax and penalty-free in retirement.1 (Contributions can be withdrawn at any time without taxes or penalties.)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 child’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. Yearly contribution limits may be adjusted for inflation by the IRS.
- The 529 plan must be open for 15 years.
- The money that's being rolled over must have been in the plan for five years.
If you’re hesitant to open a 529 plan or concerned about what to do with the money if it’s not used for college, the Roth IRA rollover option may be a benefit. It’s a way to continue to use that money for your child’s financial future.
Learn more about saving for and paying for college in The ABCs of education savings. Learn about Invesco’s College Bound 529.
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.
