Rolling 529 Plan into Roth IRA

August 3, 2023

The 529 plan is a longstanding way for people to save for their child’s future education expenses. There are many benefits to having a 529 plan, including:

tax breaks

higher contribution limits than other accounts

low maintenance

The main disadvantage of funding a 529 plan is if your child ends up not using the money in the future, whether they receive a scholarship or decide to not go to college. If the money in the 529 plan is not used for qualified education expenses, then you will not have the benefits offered by the plan. In this case, you can transfer the account into another child’s name as the beneficiary. If you do not have another child, or anyone else who could benefit from using the money within the 529 plan, then the money will just sit in the account.

If the owner of the account decides to withdraw the money for anything other than qualified education expenses, then the owner will have to pay income tax on the earnings portion plus a 10% tax penalty.

However, starting in 2024, a new provision will allow the owner of the account to roll unused money into a Roth IRA in the name of the beneficiary. If the 529 plan has been opened and funded for at least 15 years, the owner of the account will be able to rollover the max annual contribution each year into the Roth IRA. There is a lifetime max rollover contribution amount of $35,000.

This new provision can be very beneficial to get use out of the money within a 529 plan if your child does not need the money during college.