The Details on Transferring 529 Funds into a Roth IRA

You may have heard some rumblings this year of the new opportunity to roll 529 funds into a Roth IRA, thanks to the Consolidated Appropriations Act of 2023 (specifically its SECURE 2.0 segment). It's certainly an additional benefit of 529s, but it comes with several stipulations. We break them down for you here.

What changed?

Unused funds from a 529 colleges savings account can be transferred into a Roth IRA for the same beneficiary without any penalty or federal tax ramifications. The transfer acts as a rollover.

When does it go into effect?

This all started on January 1, 2024.

How much money can be transferred?

• The amount transferred each year is subject to the annual IRA contribution limits (currently $7,000 for those under 50 and $8,000 for those over 50), which also must take into consideration any other contribution made to the Roth IRA during the year.
• The funds transferred cannot include any contributions made in the last five years (or any earnings on those contributions).
• Only $35,000 in total can be transferred per beneficiary.

Is there an income limit?

The typical income limits for Roth IRAs don't apply (so those beneficiaries with high income can still benefit) but the beneficiary must have earned income equal to or more than the rollover amount in order for the 529 funds to be transferred.

Any other guidelines?

• The 529 account must have been opened at least 15 years prior.
• You can only transfer funds once every 12 months.

Can I change the beneficiary of the 529 plan to someone else?

You can always change the beneficiary of a 529 plan to another person in the family, but the change will likely reset the clock marking the required 15 years of maintenance. That means you may need to wait 15 years after the beneficiary change to transfer any funds.

What about state taxes?

Depending on where you live, a rollover of your 529 funds into a Roth IRA may still incur state taxes. Consult your financial advisor for details.

How do I make the transfer?

1. Check with your 529 plan provider to complete any necessary paperwork prior to your rollover.
2. Withdraw the unused funds from your 529 plan.
3. Within 60 days, deposit those funds into a Roth IRA. Remember, the beneficiary of both accounts must be the same.

Where do I go with questions?

Talk to your financial advisor with questions and to discuss any additional ramifications on your finances before you decide to move any funds.