Understanding 529 rollover to Roth IRA
Section 529 college savings plans offer many benefits to families preparing for soaring tuition down the road. Recent legislative changes also allow for converting 529 funds to a Roth IRA, thus possibly avoiding some taxes and penalties.
Late in 2022 Congress passed legislation known as the SECURE Act 2.0. The law made many important changes to retirement planning, including the creation of a new planning opportunity for some owners of a college tuition investment tool, Section 529 college savings plan.
A 529 plan is a tax-advantaged account that can be used in some states to pay up to $10,000 for educational expenses from kindergarten through 12th grade. There is no annual spending cap on college through graduate school, including apprenticeship programs , though the maximum 529 plan total contribution limit per beneficiary varies by state from $235,000 to greater than $550,000.
A common challenge when planning with 529 plans is what to do with unused funds once the beneficiary has completed their education. Some options are distributing the remaining funds, which often results in significant taxes and penalties, or designating a new beneficiary. Thanks to SECURE Act 2.0, we now have another option – 529 funds can now be rolled over to a Roth IRA if certain requirements are met.
"Many of my clients have invested in their 529 plans for five, ten, and some even 15 years. For those with a balance after a child has graduated or didn’t for whatever reason, a 529 rollover to Roth IRA is now potentially a great option for them."
Stephanie R. Kormanec
Wealth Strategist, Huntington Private Bank®
How does a 529 rollover to Roth IRA work?
Beginning in 2024, the custodian of a 529 plan will have the opportunity to take funds in the account and move them to a Roth IRA for the 529 beneficiary without triggering extra income taxes or penalties.
Unfortunately, this conversion opportunity will not be open to every 529, but only those who meet the following statutory restrictions:
- Converting a 529 plan to Roth IRA is only available for funds which were contributed to 529 accounts more than 15 years ago.
- The funds must be moved from the 529 into a Roth IRA for the designated beneficiary.
- The existing Roth IRA contribution rules for the beneficiary still appear to apply*, including total annual contribution limits, and earned income requirements.
- Each 529 beneficiary has a total lifetime conversion limit of $35,000.
*Although the statutory provisions are in place, the IRS has not yet released regulations associated with the program. Those regulations, when in effect, may change how some of these restrictions are interpreted.
Example: Your grandchild is finishing their last year in graduate school and has $21,000 left in the 529 that you funded 20 years ago as a first birthday present. Since the funds have been in place for more than 15 years, over the next several years you can consider converting some of the 529 funds to a Roth for the grandchild’s benefit. Remember, you’re not allowed to convert more than the annual Roth IRA contribution limit–$7,000 in 2024–and your grandchild must have earned income equal to or greater than the contribution.
If the grandchild made their own Roth IRA contribution, say $2,000, then you would only be able to convert $5,000 as the total contributions must still meet or fall below the annual limit of $7,000. If you did three annual conversions of $7,000 for a total of $21,000 the result would likely be that all the assets of the 529 plan could be converted to the Roth IRA.
Getting the advice you may need
We’re prepared to work with your legal and tax advisors to explore whether the 529 to Roth conversion strategy is right for you. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.
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