Tax-advantaged 529 education savings plans have long been a popular way for families to set money aside for education expenses. Now they’re even more flexible, thanks to a provision under the SECURE 2.0 Act of 2022 that allows for a 529 plan rollover of unused assets to a Roth IRA, when certain restrictions are met.
How 529 plans work
A 529 plan allows individuals to contribute funds that can grow tax-free and be withdrawn without incurring state or federal taxes when used for a broad range of qualified expenses. These include up to $10,000 per year in K-12 tuition; college tuition, fees, books, and certain room and board costs; as well as ongoing education and professional certifications obtained through qualified institutions.
With all these advantages, how does a 529 plan rollover help? Funds used for nonqualified purposes are generally subject to a 10% penalty in addition to state and federal income taxes on any gains in the amounts withdrawn. That can be a problem if you’re sitting on a plan with excess savings and there is no need to transfer the excess savings to another beneficiary.
What is a 529 plan rollover?
Starting in 2024, account beneficiaries can roll over a lifetime limit of $35,000 from a 529 account in their name to a Roth IRA. For account owners and their beneficiaries, a 529 plan rollover provides a penalty-free option for transferring unused plan savings to the named beneficiary. However, 529 plan rollovers are subject to certain restrictions.
- The 529 account must be open for at least 15 years before funds can be rolled into a Roth IRA
- 529 contributions made within the preceding five years cannot be rolled over
- If the 529 beneficiary is different from the 529 account owner, the Roth IRA must be in the beneficiary’s name
- The lifetime maximum that can be rolled over is $35,000
- Rollover amounts are subject to annual Roth IRA contribution limits. The limit for tax-year 2024 is $7,000 with a $1,000 catch-up contribution for those age 50 and older. Assuming the 529 plan rollover amount is $7,000 ($8,000 for those 50 or over), the beneficiary would not be able to make any IRA contributions for the year.
Should you consider a 529 plan rollover?
A 529 plan rollover is one of several options available to account owners with unused plan assets. Account owners also have the ability to switch beneficiaries to another child or family member and continue using the account for educational expenses. In the event a beneficiary earns a tax-free scholarship, the account owner can take an equivalent amount out of the 529 plan without incurring the 10% penalty (though the earnings portion of the distributions will be taxable). In addition, a lifetime limit of up to $10,000 per beneficiary may be used to pay off qualifying student loans.
It’s important to keep in mind that a 529 plan rollover of unused assets into a Roth IRA at a later date is not a reason to overfund a 529 plan. Drawbacks include the long waiting period until assets are eligible to be rolled over, as well as strict limitations on amounts that can be rolled over annually.
To learn more about 529 plan rollovers, and the role that 529 plans can play in helping you pursue specific education, tax, and legacy planning goals, listen to my latest podcast episode at Frank Wealth Insights. If you’d like to learn more about how we can help you pursue the Return on Life® you desire, contact us today for a free consultation.
About Return on Life Wealth Partners
Return on Life Wealth Partners is an independent Registered Investment Advisor (RIA) founded in 1994, with headquarters in Cleveland. The team provides comprehensive wealth planning services to individuals, families, and business owners. By examining clients’ lives before their money, Return on Life® aligns its advice with clients’ values to help achieve the milestones that matter most to them. This personalized approach also extends to the institutional and corporate retirement plan services available through 401(k) Prosperity®.
Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
Pursuant to Section 529(b)(1)(A)(ii) of the Internal Revenue Code, 529 plans are known as Qualified Tuition Plans. There are two types of 529 plans: savings plans and prepaid tuition plans. Both are generally sponsored by states or state agencies. Each plan has its own eligibility requirements, so please consult your Financial Advisor or the plan offering documents for more information. A comprehensive list of disclosure matters are addressed in connection with the Savings Plans in order to fulfill the responsibilities of state issuers to account owners. These disclosures are intended to present information in a clear manner and do not overlap with the disclosure obligations of broker-dealers or investment managers who are involved with Savings Plans. Understanding the differences between plan types and state-specific state tax benefits is important. Return on Life Wealth Partners suggests you consult with your individual tax or legal advisor.
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