Roll Over Excess 529 Funds to a Roth IRA

Starting in 2024, 529 educational savings plans will become even more attractive with enhanced tax benefits. If your student receives scholarships or joins the military, there is a new option for handling excess 529 plan funds.

SECURE 2.0

The SECURE Act 2.0, which became law late in 2022, enables 529 beneficiaries to place unused 529 funds into their Roth IRA - without penalty. Understand that the rollover can only be made to the 529 beneficiary's Roth IRA - not a parent's Roth IRA.

This new rule can have an incredible impact on the student's ability to successfully fund a comfortable retirement, thanks to the power of compound interest.

OTHER OPTIONS

You still have the option of changing a 529 plan beneficiary to another qualifying family member. But the funds would have to be used for educational purposes. Alternatively, you could withdraw excess funds and pay a 10% penalty.

OBEY THE RULES

As with most tax laws, numerous rules govern a 529 plan to Roth IRA rollover. Keep these in mind:

• A max of $35,000 can be rolled over from a 529 plan to a beneficiary's Roth IRA.


• Annual Roth IRA contribution limits apply to rollovers. (For example, if this law was already in effect, the 2023 ROTH IRA contribution limit is $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA).


• Conversions can only be made to a beneficiary's Roth IRA; a parent saving with a 529 plan in a child's name cannot convert unused funds back into their own retirement account.


• Rollovers are not allowed until a 529 account has been open for at least 15 years.


• Funds you convert from 529 plans to Roth IRAs must have been in the account for at least five years.

Consult your tax professional to learn more.