4 Things You Must Know Before Rolling Over Your 529 College Savings Into an IRA
Written by
Adam Palasciano
Edited by
Nicholas Morine
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Saving for your child’s higher education as early as possible is crucial to ensure they have enough funds to pay for college. However, for some, there could be a balance left in their 529 college savings account after all college expenses are paid. Now, it’s possible to use those funds to benefit your child’s retirement.
CNBC reported that starting in 2024, families can now roll unused 529 plan funds to the account beneficiary’s Roth IRA, without triggering income taxes or penalties.
This change was made possible thanks to the passage of the Secure 2.0 Act which offers more financial flexibility. At the same time, there are several caveats to be aware of if you’re considering a 529 to Roth IRA conversion.
4 Caveats To Be Aware Of If You’re Considering a 529 To Roth IRA Conversion
- A 529 to Roth IRA conversion counts toward your annual contribution limit: For tax year 2024, the Roth IRA contribution limit is $7,000, or $8,000 for those age 50 or older. So, if you want to roll over $35,000 worth of funds from a 529 account, it would take five years of $7,000 contributions to reach the $35,000 lifetime cap (not accounting for future changes to the contribution limit, either annual or lifetime). This means that the beneficiary wouldn’t be able to contribute to their Roth IRA with earned income for five years.
- You can’t rollover the previous five years of 529 contributions: Whatever you’ve contributed to a 529 account within the past five years is not eligible to be rolled over to the beneficiary’s Roth IRA.Â
- You must have enough earned income: In order to roll over any amount of money to the beneficiary’s Roth IRA, the beneficiary must have earned income equal to the amount that’s being rolled over. This applies even though the actual money being rolled over isn’t earned income. So, if you roll over $7,000 per year until the $35,000 lifetime cap is reached, the beneficiary would need to earn at least $7,000 in each of those tax years.
- The 529 plan must have been open for at least 15 years: The 529 plan itself must have been open for at least 15 years before rolling over any money to the beneficiary’s Roth IRA (at least without taxes or penalty).
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