Do you have excess money in a 529 plan? Maybe your child decided not to go to college or received scholarships you didn’t reimburse yourself for from the 529 plan in the year received. Maybe college just didn’t cost as much as you had saved for. Great if you have another child to roll the funds to or if you could use the funds for furthering your own education by naming yourself as beneficiary. You also could wait until your child has children of their own and change the beneficiary to their child (your grandchild). These options could allow the balance to still be withdrawn tax-free, penalty-free. Otherwise, this new law may be of interest to you.
Starting this year, a provision under the SECURE 2.0 Act provides an opportunity for those with unused 529 college savings plan balances. In certain circumstances, you can roll the 529 plan funds over into a Roth IRA for the plan’s beneficiary. This change offers a flexible way to repurpose education savings for retirement, ensuring your money continues to work for your family.
What is a 529 Plan?
A 529 plan is a tax-advantaged savings account designed to help families save for education expenses. Contributions grow tax-free, and withdrawals are tax-free when used for qualified education expenses like tuition, books, and room and board.
The New Rollover Provision
Under the SECURE 2.0 Act, starting in 2024, you can roll over up to $35,000 from a 529 plan to a Roth IRA for the same beneficiary. This rollover is tax- and penalty-free, providing a way to use leftover education funds for retirement savings. New York law recently changed to allow NY 529 plans to count this Roth rollover as a qualified withdrawal.
Key Conditions and Limits
- Lifetime Rollover Limit: The maximum amount you can roll over from a 529 plan to a Roth IRA is $35,000 over the beneficiary’s lifetime.
- Account Age: The 529 plan must have been open for at least 15 years for that beneficiary. The clock restarts if you change beneficiaries.
- Contribution Age: Contributions made to the 529 plan, and earnings thereon, within the last five years are not eligible for rollover.
- Roth IRA Owner: The Roth IRA has to be for the same person who is beneficiary of the 529 plan. That could even be yourself if you change the 529 plan beneficiary beforehand to you (but have to then wait 15 years).
- Annual Contribution & Rollover Limit: The annual rollover amount is subject to the annual Roth IRA contribution rules and limits. The 529 rollover to Roth becomes like a Roth IRA contribution, just using the 529 funds from the rollover, if eligible.
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- Annual Contribution Limits: The total amount rolled over from the 529 plan to the Roth IRA, combined with any other contributions to the Roth IRA for that year, cannot exceed the annual Roth IRA contribution limit, disregarding Roth IRA AGI limits. The 2024 and 2025 (no change) Roth IRA contribution limit is $7,000 for individuals under age 50 and $8,000 for those age 50 and over. The rollover contribution can be made starting January 1st of that year, up until 4/15 the next year (the same timing as for a Roth IRA or IRA contribution).
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- Earned Income Requirement: The beneficiary must have earned income at least equal to the amount being contributed to the Roth IRA, including the rollover amount.
Benefits of the Rollover
- Tax Efficiency: Avoid taxes and penalties on unused 529 funds.
- Retirement Boost: Provides an additional way to save for retirement, especially beneficial if the beneficiary’s income is too high to contribute directly to a Roth IRA.
- Flexibility: Offers a solution for families who overfunded a 529 plan or whose beneficiaries received scholarships or chose less expensive education options.
Things to Consider
- IRA or Roth IRA Contribution Limit Used Up: The rollover contribution limits or prohibits the child from making any other IRA or Roth IRA contributions. If they were already making contributions, perhaps they continue doing so AND keep the 529 balance, possibly for their own children down the road.
- Other Options or Options for the Rest of the Unused Balance
- Change the beneficiary to another child or grandchild (note changing the beneficiary from a child to a grandchild could have gift tax implications for the child).
- If the child received a scholarship earlier this year, you could reimburse from the 529 plan before year end for the amount of the scholarship. The distribution would be taxable, but penalty-free.
- Name yourself as 529 plan beneficiary and either use it for furthering your own education or to later name a grandchild as beneficiary.
- Take a distribution to pay up to $10,000 of principal or interest on a federal student loan for the beneficiary or any siblings. This is now a qualified distribution for New York 529 plans (as of 9/5/24)
- Use the funds for an apprenticeship program for the beneficiary (qualified distributions) or to pay K-12 tuition for a young beneficiary (qualified for federal but not a qualified expense for New York’s 529 plan).
- Consult a Professional: Given the specific conditions and potential complexities, it’s wise to consult with a financial advisor or tax professional to ensure you’re making the best decision for your situation.
- Stay Informed: The IRS may provide further guidance on this provision, so keep an eye out for updates that could affect your rollover strategy.
Though the lifetime and annual limits are low, the new 529-to-Roth IRA rollover provision can be a valuable tool for maximizing the benefits of your savings when no other options work for you. By understanding the rules and planning accordingly, you can make the most of your 529 plan and secure a brighter financial future for your loved ones.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
