In 2022, 529 plans saw a decline in overall investments, reaching $411 billion (1). Research suggests investors may question its value due to uncertainties about their children receiving scholarships or opting not to pursue college.

Up until now, the funds had to be used for qualified education expenses such as books and education fees. With time, the account has had some flexibility allowing owners to use the funds for student loans or continuing education classes. However, Starting Jan. 1, 2024, the savings can also be put toward retirement tax-free.

While these alterations enhance the account’s appeal to investors, it’s prudent to consult a financial professional for a comprehensive understanding before making any decisions. Let’s explore some of the advantages and potential drawbacks of a 529 to Roth IRA rollover conversion.

Some states offer tax deductions or credits for contributions, while others provide scholarships and matching contributions for in-state 529 plans. (1)

With time, there has been a noticeable reduction in contributions to college plans. Many students have considered not enrolling in college at all, while others receive scholarships and decide not to use the funds.

Although you may change the beneficiary or withdraw the amount of the scholarship penalty-free, the new updates allow individuals to transfer the funds to a retirement account tax-free which is an attractive option for investors.

The update specifically provides a way for 529 investors to transfer leftover funds to a Roth IRA, after 15 years up to a limit of $35,000. (1)

However, before making any decisions, it’s crucial to look at the downside.

According to Jonh Loyd, Owner of The Wealth Planner, the main drawback of a 529-to-Roth IRA rollover is that the conversion counts toward your annual IRA contribution limit, potentially affecting future growth across both accounts. (2)

For 2024, IRA contribution limits are $7,000 for those under 50 and $8,000 for those 50 or older.

Also, it’s crucial to consider the following requirements related to this update:

• The beneficiary must have earned income, and the rollover amount is the lesser of earned income or the annual Roth IRA contribution limit.
• The 529 plan must be open for at least 15 years before a rollover.
• Yearly conversions cannot exceed annual Roth IRA contribution limits, with a lifetime rollover limit of $35,000.
• The rollover must be a plan-to-plan or trustee-to-trustee, and there are no income limitations for the beneficiary to contribute to a Roth IRA.

While the new rule offers flexibility in using 529 plan funds, it’s crucial to consider the beneficiary’s earned income, the 15-year requirement, and the annual and lifetime rollover limits for informed decision-making.

Keeping the money growing in a 529 plan and contributing to a Roth IRA separately may potentially maximize tax efficiencies in some cases. To navigate this complex landscape effectively, working with a financial professional in a personalized strategy may help you find the best investment decisions.

Each situation is unique, and this new rule presents opportunities for strategic financial planning. Navigating it requires careful consideration. If you’re interested in discussing new 529 plans or changes to existing ones, let’s schedule a meeting to help you make well-informed decisions aligned with your financial goals.

We are not affiliated with any US government agency and do not provide tax or legal advice.  

Roth accounts require the owner to be 59.5 years old and have had the account open for 5 years to take penalty-free withdrawals. 

Investing involves risk, including possible loss of principal. No investment strategy can ensure financial success or protect against losses. 

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual situation. Please seek the guidance of a financial professional regarding your particular financial concerns. Consult with your tax advisor or attorney regarding specific tax issues. 

Sources:

1. (1) Jdickler. “A ‘significant Objection’ to 529 College Savings Plans Will Go Away Jan. 1. ‘This Is a Big Deal,’ Expert Says.” CNBC, 28 Dec. 2023, www.cnbc.com/2023/12/28/a-major-barrier-to-529-plans-goes-away-in-2024-thanks-to-secure-2point0-.html?recirc=taboolainternal.

1. (2) Dore, Kate, and Cfp®. “New Change to 529 College Savings Plans Has ‘So Many Caveats,’ Advisor Says. Here’s What to Know.” CNBC, 3 Jan. 2024, www.cnbc.com/2024/01/03/heres-what-to-know-about-529-to-roth-ira-rollovers-for-2024.html.