As of 2024 you are able to convert 529 college savings accounts into Roth IRA's for the 529 account beneficiary. This conversion only became possible due to the secure act 2.0.
The next question is then, when would this be recommended or advantageous to the current 529 owner?
Benefits of This Transfer
Avoiding Penalties: If a 529 plan is no longer needed for education, this option avoids the 10% penalty on earnings for non-qualified withdrawals.
Tax-Advantaged Growth: The funds continue to grow tax-free in the Roth IRA.
Non Taxable Transfer: Because 529 contributions aren't deductible you can convert them into your child's Roth without paying taxes on the funds.
Key Details of the 529-to-Roth IRA Transfer
Lifetime Limit: A total of $35,000 can be transferred from a 529 plan to a Roth IRA per beneficiary over their lifetime.
Account Age Requirement: The 529 plan must have been open for at least 15 years before a transfer to a Roth IRA is allowed.
Contribution Limitations:
The amount transferred in any year counts toward the annual Roth IRA contribution limit (currently $7,000 for individuals under 50 and $8,000 for those 50 and older in 2024).
Transfers cannot exceed the total amount of contributions made to the 529 plan more than five years ago, plus any earnings on those contributions.
Beneficiary Restrictions
The Roth IRA must be in the name of the 529 plan’s beneficiary.
You cannot transfer funds to a different person unless you first change the 529 beneficiary to match the intended Roth IRA owner.
Income Limits: Unlike standard Roth IRA contributions, income limits do not apply to transfers from a 529 plan.
Steps to Execute a 529-to-Roth IRA Transfer
Verify the 529 plan meets the eligibility criteria, including the 15-year age rule.
Confirm the amount you wish to transfer complies with the annual Roth IRA contribution limit and the $35,000 lifetime limit.
Contact your 529 plan provider to initiate the transfer to the Roth IRA custodian.
Limitations to Consider
The transfer is not immediate; planning is needed to meet the requirements.
Not all 529 contributions may qualify due to the five-year rule. This means that even though the 529 was open for 15+ years you can't convert 529 dollars that were deposited within the last 5 years.
This strategy is excellent for families who have overfunded a 529 plan. It isn’t a home run, in my opinion, but it’s a great tool for those who qualify.
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