Monday, July 22, 2024
Home Personal Finance Rollover rules from a 529 plan to a Roth IRA: What you need to know

Rollover rules from a 529 plan to a Roth IRA: What you need to know

by xyonent
0 comment
Thecollegeinvestor Allsizes How To Rollover A 529 Plan To An Ira 1200x628.jpg.optimal.jpg

*Most* Americans can now rollover their 529 plans into Roth IRAs, but there are a lot of “caves” to be aware of.

There are some new benefits for 529 plan investors: The SECURE 2.0 Act of 2022, included in the Consolidated Appropriations Act of 2023 (P.L. 117-328), includes some new benefits that investors in 529 plans and ABLE accounts should be aware of.

The most “high-profile” change in the Secure Act 2.0 is the ability to rollover up to $35,000 from a 529 plan to an IRA, which took effect in 2024. This is another addition that has made 529 plans a powerful savings and investment tool for education, and now retirement.

Here’s what you need to know about rolling over a 529 plan into an IRA.

Rollover from a 529 Plan to a Roth IRA

family May It allows you to rollover funds from a 529 plan into a Roth IRA owned by the 529 plan beneficiary.

You cannot roll funds over to a Roth IRA owned by the 529 plan account owner or anyone else; only the beneficiary can do so. Of course, you can change the beneficiary of a 529 plan and roll the funds over to the new beneficiary’s Roth IRA.

Rollover Limits

There is a lifetime limit of $35,000 per beneficiary. The limit is per personThe limits apply regardless of how many 529 plans you have, not per 529 plan.

However, up to $35,000 per beneficiary can be rolled over to multiple beneficiaries. There’s nothing preventing you from changing the beneficiary of a 529 plan, but the per-beneficiary limit still exists.

The 529 plan must have been in existence for at least 15 years. Only funds that have been in the 529 plan for at least five years are eligible for rollover.

The rollover must be done through a trustee-to-trustee transfer.

Combining 529 Plan and Roth IRA Contribution Limits

Roth IRA contribution limits (annual dollar limits) still apply, so rollovers from a 529 plan to a Roth IRA are limited, including the annual Roth IRA contribution limits minus all other contributions made during the year to IRAs owned by the beneficiary.

Given the conflict between the $35,000 lifetime limit and annual contribution limits, it could take several years to roll over the balance in a 529 plan.

The Roth IRA income limitations are waived when it comes to Roth IRA rollovers.

Contributions and earnings from the 529 plan are rolled over pro rata and carried over to the Roth IRA, so you receive the rollover contribution portion tax-free. rear It will show up in your Roth IRA.

Things to be aware of

Many are touting this as a great new way for families to save for their children’s education. and
retirement.

However, it is important to note that there is one major “gotcha” to be aware of.

This means that each state makes its own rules about qualified distributions from a 529 plan. Some states may not consider a rollover from a 529 plan to an IRA to be a qualified distribution. In fact, only 33 states currently allow this.

In this case, if you roll over the funds, you could be subject to taxes and penalties on the rolled over amount.The fact that it’s a rollover doesn’t help, as some states consider a rollover into a 529 plan nonqualified if it’s a rollover into an out-of-state 529 plan.

Before you rush into doing this, make sure your state complies with the federal regulations. Some states will comply quickly, while others (notably California) typically choose not to comply.

Find your state in our 529 Plan Guide or click on your state on the map below.

Who should consider this option?

Roth IRA rollovers are a useful tool for people with excess money in their 529 plans. They also address concerns some investors have about the trade-off between funding college and saving for retirement (or the potential penalties for overcontributing to a 529 plan).

Advance

There are some details in the law that the IRS needs to clarify, such as rollovers being limited to contributions made as of five years prior to the distribution date, and earnings attributable to those contributions.

It is unclear whether this refers to earnings five years prior to the dividend date or to earnings thereafter, and the statutory language contains a double negative, making it difficult to interpret.

The new rules apply to all qualified tuition programs, including 529 plans and prepaid tuition plans, but do not apply to Coverdell Education Savings Accounts.

Please check it Student Loan and Financial Aid Programs by State Find more ways to save on tuition.

You may also like

Leave a Comment

About Us

Investxyon

At InvestXyon, we empower individuals with knowledge for informed investing, financial navigation, and secure futures. Our trusted platform covers investments, stocks, personal finance, retirement, and more.

Feature Posts

Newsletter

Subscribe my Newsletter for new blog posts, tips & new photos. Let's stay updated!