How to roll over a 529 to a Roth IRA?
Learn how to rollover your 529 plan to a Roth IRA. Or, answer a few questions below and speak with a financial advisor to get personalized retirement advice.
Summary
A 529 plan is a tax-free savings account for education expenses, while a Roth IRA is geared towards tax-free retirement savings.
To roll over a 529 to a Roth IRA, the plan must have been open for at least 15 years, and the funds must have been in the account for five years.
There are annual contribution limits and a lifetime cap of $35,000 for 529 to Roth IRA rollovers.
A financial advisor can help you make smart, strategic decisions when it comes to saving for retirement and ensure you make the most of your money.
What is a 529 rollover?
A 529 plan is an investment account designed to help families save for education costs. A 529 plan can be either a savings plan, where money is invested or a prepaid tuition plan, where college fees are paid in advance.
The big advantage of a 529 plan is that your money grows tax-free, and you don’t pay taxes when you use it for qualified educational expenses like tuition, books, and housing.
Traditionally, if families had any money left in these plans, they were very limited in what they could do with it.
However, following the SECURE 2.0 Act, distributions from 529 plans can now be rolled over tax and penalty-free to a Roth IRA – a retirement savings account where investments grow tax-free.
Roth IRAs offer flexibility with withdrawals and provide tax-free income in retirement.
However, in order to complete a 529 rollover, you have to meet multiple different conditions.
What are the eligibility criteria for a 529 to Roth IRA rollover?
529 rollovers are relatively new, having only started in 2024. While they are advantageous, only some people can roll over a 529 to a Roth IRA.
These are some of the key 529 rollovers to Roth rules to keep in mind:
The account beneficiary (usually the student) must receive the rollover into their Roth IRA. This means that if you’re a parent or grandparent who owns the 529 plan, you can’t roll the funds into your own Roth IRA.
· The 529 plan must have been open for at least 15 years, and the money you transfer must have been in the account for at least five years.
Roth IRAs have annual contribution limits. For 2024, you can only contribute up to $6,500 per year (or $7,500 if you’re 50 or older).
The rollover must be direct – you can’t take out money from the 529 plan and deposit it into your Roth IRA.
How much can you roll over from a 529 to a Roth IRA?
The lifetime cap on the total amount that can be rolled over from a 529 to a Roth IRA is $35,000.
Along with the other rules, this prevents people from abusing the tax benefits of 529 plans by quickly moving money around.
You might think about rolling over a 529 to a Roth IRA if you have leftover money after covering education costs or if your beneficiary decides not to go to college. This way, you can turn those unused education savings into a retirement nest egg.
How do you rollover money from a 529 to a Roth IRA?
As mentioned, the Roth IRA has to be in the 529 plan beneficiaries name.
IRAs often require sufficient earned income, although it is still unclear if this applies to 529 conversions, so it’s best to get expert advice or speak to your provider.
Once your Roth IRA account is ready to go, you can contact your 529 plan provider and state you want to complete a rollover.
You will then have to complete any necessary forms and direct your 529 plan provider to send your savings to your Roth IRA directly.
Remember, there is a limit on annual Roth IRA contributions and how much you can roll over in your lifetime.
What are the pros and cons of a 529 rollover to a Roth IRA?
Rolling over a 529 to a Roth IRA has its advantages and disadvantages. Both of which you should weigh up before you make a financial decision.
Here are some factors you should consider when deciding to convert a 529 to a Roth IRA:
Pros of a 529 rollover:
Tax-free growth: Your money continues to grow tax-free in a Roth IRA, offering long-term benefits.
Retirement savings: You can boost your retirement savings with leftover 529 funds, especially if you don’t need them for education.
Flexibility: It provides another way to use your 529 funds, adding more options to your financial planning toolkit.
Cons of a 529 rollover:
Contribution limits: There are caps on how much you can roll over each year and in total, which might limit the benefits.
Qualified expenses: Once the money is in a Roth IRA, it can only be used tax-free for retirement expenses, not for future education costs.
Eligibility restrictions: Only the beneficiary of the 529 plan can roll over the funds.
What are the potential risks of a 529 rollover?
One of the biggest risks with 529 rollovers is losing educational funding.
If you transfer the money and then need it for education, you could face penalties and taxes for non-qualified withdrawals from the Roth IRA.
Assess your educational funding needs before transferring funds to make sure you don’t end up short.
Plan carefully to avoid these risks. Consider talking to a financial advisor to ensure that a rollover fits your long-term goals.
Are there alternatives to a 529 rollover?
If a 529 rollover to a Roth IRA doesn’t seem like the best option, there are other ways to use leftover 529 funds.
One choice is to change the beneficiary to another family member who might need educational funding. This keeps the money in the family for education purposes.
Another option is to use the funds for other qualified educational expenses, like graduate school or continuing education. This can be a great way to invest in lifelong learning and career growth.
Get expert advice on managing your 529 rollover
Understanding the ins and outs of a 529 to Roth IRA rollover can help you make smart decisions about your savings.
Unbiased will connect you with a financial advisor for expert financial advice on how to optimize your savings and retirement strategies.
Senior Content Writer
Rachel is a Senior Content Writer at Unbiased. She has nearly a decade of experience writing and producing content across a range of different sectors.