Congratulations! You have put your child(ren) through college and you have money left in their 529 college savings plans. You may have heard that you can move some of that money to a Roth IRA for the child but do not know all of the details. Read on! Below, we will outline some important information in Q&A format about the 529-to-Roth IRA rule.
Q: What is the 529-to-Roth IRA rule?
A: Starting in 2024, if you have money leftover in a 529 plan, you may be eligible to convert some of those assets to a Roth IRA for the beneficiary.
Q: What are the eligibility factors?
A: First, the 529 account must have been open for at least 15 years. If you have changed designated beneficiaries, it will likely have restarted the 15-year clock. (NOTE: The rules around this issue are currently unclear).
Secondly, the money that is eligible to rollover must have been in the account for at least 5 years and the amount to rollover cannot exceed the 529 balance from 5 years prior.
Lastly, the beneficiary must have earned income in the year of the rollover.
Q: How much can I rollover?
A: Currently, you can rollover a total of $35,000. However, this would have to be done over several years, not all at once. IRA contribution limits apply. For 2024, the contribution limit into an IRA or Roth IRA is $7,000 (for account holders under age 50). If the beneficiary has already contributed to either a traditional IRA or a Roth IRA that year, the total limit still applies. So they would only be able to rollover the difference that year from their 529 plan to their Roth IRA.
Additionally, the beneficiary must have earned income in the amount greater than or equal to the amount being rolled over.
Q: Do maximum income limits apply to these 529-to-Roth IRA rollovers as they would with a normal Roth contribution?
A: No, maximum income limits do not apply in the event the beneficiary makes more than the normal Roth contribution limit. However, the minimum limits do apply wherein the beneficiary must make at least as much as the rollover amount.
Q: Is there any reason NOT to convert 529 Plan funds to a Roth IRA now?
A: Yes. Some states will not treat these rollovers as a qualified expense for state income tax purposes, which could result in state tax penalties. Some states may update their laws in the future. You can check the status in your state by clicking here.
Q: If I am not eligible for or do not want to do the 529 rollover, what other options do I have with leftover 529 plan assets?
A: 529 plan assets can be changed to a new beneficiary who is a qualifying family member (including yourself, or a future grandchild).
Up to $10,000 (lifetime limit per child) can be used to pay off college loans.
A non-qualified distribution can be taken. However, you will pay income tax and a 10% penalty on earnings.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
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Distributions from traditional IRAs and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.