When planning for your children’s education, a 529 plan often tops the list as a tax-advantaged way to save for college. Funds in a 529 plan grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses like tuition, room, board, and books.
A New Option: Under the SECURE 2.0 Act, 529 plan account holders can now rollover leftover funds to a Roth IRA, providing a new layer of flexibility.
Converting unused 529 plan funds into a Roth IRA can offer tax-free growth and does not require RMDs during the account holder’s lifetime. This means the funds can continue to grow tax-free for decades. Here are things to consider:
- Eligibility and Timing: The 529 plan must have been open for at least 15 years to qualify for conversion. Additionally, the contributions (and earnings on those contributions) made within the last five years cannot be converted.
- Annual Limits: The amount converted is subject to the annual Roth IRA contribution limits ($6,500 in 2024, with an additional $1,000 catch-up contribution for those 50 and older). However, these contributions are not limited by the account holder’s earned income, which can be a significant advantage.
- Lifetime Cap: There is a lifetime conversion limit of $35,000 per beneficiary.
The ability to convert unused 529 plan funds into a Roth IRA is a welcome addition to the toolkit of families planning for education and retirement. However, it’s crucial to understand the rules and plan ahead to take full advantage of this opportunity. Consult with your financial advisor to ensure that this strategy aligns with your overall financial goals.
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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 investment in any state’s 529 Plan.