In 2022, the passing of the SECURE 2.0 Act introduced new tax planning opportunities for families. One of the new provisions can help families manage their education savings more effectively by making it possible to transfer qualifying funds from a 529 education savings plan to a Roth IRA.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings and investment account designed to help families prepare for future education costs. While the account does not provide a federal tax deduction for contributions (state tax laws vary), any growth is tax-free if the withdrawal is used for qualifying expenses. These expenses include college tuition, room and board, K-12 private school expenses, professional certifications, among others. If a withdrawal does not qualify, any growth above the contributed amount is taxed at ordinary income rates plus a 10% penalty. So, proper planning is necessary to determine the right level of funding in your situation.
Prior to SECURE 2.0 Act, 529 plans already had some flexibility to avoid the 10% penalty and taxation on nonqualified withdrawals. For example, you can change the beneficiary of the account to another child or family member.
However, what happens when you have funds remaining in a 529 plan and no other family members are expected to incur qualifying education expenses? In the past, you would have been faced with the choice of saving these funds for potential future grandchildren, or you would have faced taxation and a 10% penalty for non-qualified withdrawals.
What is a Roth IRA?
A Roth IRA is a retirement savings account that offers tax-free growth and tax-free qualifying withdrawals in retirement. As you can imagine, this can be a useful planning tool in certain circumstances, especially for young adult children who have a long time horizon until retirement. Because a Roth IRA can be so powerful, the IRS limits annual contributions each year ($7,500 for those under the age of 50 in 2026).
Converting 529 Plans to Roth IRAs: The New Opportunity
Thanks to the new provisions in the SECURE 2.0 Act, there’s now an opportunity to convert unused 529 plan funds into a Roth IRA for the same beneficiary beginning in 2024. Here’s how you can qualify:
Key Rules and Requirements:
- Age of account requirement: The 529 plan must have been open for at least 15 years before the conversion can take place.
- Holding period requirement: The funds rolled to a Roth IRA must have been contributed to the 529 five or more years ago.
- Same Beneficiary: The funds must be rolled to a Roth IRA owned by the beneficiary of the 529 plan.
- Contribution Limits: As of 2026, the annual Roth IRA contribution limit is $7,500, or $8,600 for individuals age 50 or older, and these limits apply to amounts rolled over from a 529 plan. Any 529 rollovers also limit other direct IRA or Roth IRA contributions for the beneficiary. Additionally, the legislation has imposed a lifetime limit to the amount rolled to one beneficiary’s Roth IRA to $35,000. While Roth IRA contributions are generally subject to income limits, these income limits do not apply to qualified rollovers from a 529 plan; however, the beneficiary must still have sufficient earned income, at least equal to the amount rolled over in each year.
So, this new rule allows you to transition $35,000 of unused 529 funds to a tax-free account to benefit those who you care about. We understand that life doesn’t always go as planned, and your education savings may result in a greater amount than needed. In certain situations, this strategy may reduce taxes and penalties compared to non qualified withdrawals. For illustrative purposes only, $35,000 in a Roth IRA has the potential to grow in a tax-free account over time. While long-term tax-free growth may be possible, outcomes depend on contribution timing, investment selection, market conditions, and individual circumstances. Actual results will vary and investments involve risk.
This new legislation presents a powerful strategy for families with unused 529 funds. Converting those funds into a Roth IRA offers a flexible, tax-efficient way to plan for the future. While it comes with some limitations, the potential benefits may be significant, depending on individual circumstances. If you have questions about how this could impact your financial situation, we’re here to help you understand your options and help you evaluateyou evaluate whether this strategy aligns with your overall financial plan.
Contact us today to learn more about whether this strategy may be appropriate for your situation.
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