What to know about rolling over a 529 plan to a Roth IRA in 2024 (2024)

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• The new 529 plan penalty-free rollover rule offers a way to convert education savings into retirement savings.
• 529 plan funds can now be rolled over into Roth IRA accounts, which offer similar tax advantages.
• A 529 plan must be active for at least 15 years before it's eligible for a rollover into a Roth IRA.

Investing in a 529 plan is one of the most popular ways parents save for their children's education. The contributions grow tax-free. And as long as you use the money for qualified academic expenses, you won't pay any federal income tax on withdrawals.

Starting in 2024, you can also transfer money from 529 plans into Roth IRAs. A provision in a federal law called the Secure 2.0 Act enables penalty- and tax-free rollovers into these retirement investment accounts, which have similar tax advantages.

"The new Roth IRA rollover rule transforms 529 plans from simply being a school savings account into the 'Swiss Army' savings account that every American should be using regardless of age or income," says Yosh Miller, RIA and founder of Hadley.

An important caveat to remember is that you can only rollover funds from a 529 plan that has been active for at least 15 years.

Here's what you need to know about the 529 plan rule in 2024.

Why the new 529 rule matters

A 529 plan is a state-run, tax-advantaged educational savings account for folks to save toward qualifying academic expenses like college tuition, student loan payments, or vocational school. In recent years, K-12 tuition and fees, apprenticeships, and other trade and technical schools were also deemed to be qualifying expenses.

"President Bush let 529s compound tax-free money. President Obama let 529s cover disability-related expenses. Trump let them cover private K-12 tuition and student loan repayments." Miller says. "Now, Biden is letting 529 plans convert into a Roth IRA. The trajectory of 529 plans is expanding, and the limits are continuing to grow."

You can rollas much as $35,000 from a 529 plan into a Roth IRA without incurring the usual 10% penalty for non-qualified withdrawals. You'll even avoid federal income tax and, in most cases, state income tax.

Almost anyone can be a beneficiary of your 529 plan. You can change the beneficiary as many times as you like. 529 plans can be opened on behalf of a child, grandchild, niece, nephew, godchild, or even yourself if you decide to pursue further education or certification.

Parents of kids with a 529 plan can even make themselves the beneficiaries and then convert that money into a Roth IRA for future retirement savings.

A new strategy to boost retirement savings

The penalty-free rollovers provide another path to build long-term wealth if there's money left over in a 529 plan after a beneficiary is finished with school or if they decided not to pursue traditional higher education and didn't take advantage of the plan's benefits.

Depending on your 529 plan, you could even theoretically open a 529 plan as a placeholder for retirement savings. You'll dodge IRA annual contribution limits while still benefiting from long-term tax-free growth. 529 plans don't have a yearly contribution limit. However, individual states may set aggregate limits, typically between $235,000 and $550,000.

Friends and family are also able to gift money into a 529 plan.

"People can open a 529 plan and allow others to contribute toward it for baby showers, birthdays, etc. so that money can start growing," says Miller. "Now that kid can take advantage of the power of tax-free growth and compound, so even if the family is not able to access the funds themselves because of financial restrictions, that kid is still able to save."

Some of that saved money can remain in a 529 plan for academic expenses, while a portion of it can be rolled over into a Roth IRA for that kid to start securing retirement savings and take advantage of compounding interest from a very young age. If need be, funds in a 529 can also cover disability expenses like healthcare costs.

Drawbacks of rolling over 529 assets into a Roth IRA

While rolling over your 529 plan assets into a Roth IRA provides a number of benefits, there are some drawbacks to consider.

First, there's a lifetime limit of $35,000 for 529 plan rollovers into a Roth IRA. If you have more than $35,000 in your account, you won't be able to transfer those remaining funds into your Roth IRA. Moreover, you're only allowed to transfer a max of $8,000 a year into an IRA. So, it may take several years to complete the transfer.

In addition, a 529 plan must be active for at least 15 years before its eligible for a penalty-free rollover. While you can still contribute funds into this account with the goal of transferring them later, you'll have to wait a significant chunk of time.

Another drawback is that once you transfer the money into your retirement plan, you won't be able to undo the transfer. All non-eligible withdrawals from a Roth IRA are charged with a 10% penalty of the amount withdrawn. Make sure that a 529 rollover is definitely the right financial move for you before making the transition.

Remember that 529 plans vary by state. Double-check that you choose a plan that allows rollovers and suits your needs. Luckily, most plans allow out-of-state participants, so where you live doesn't necessarily limit your plan options.

529-to-Roth IRA rollover guidelines

Overall, 529 plans offer an accessible and tax-advantaged way for folks to save for education-related expenses. They offer flexibility, gift-giving potential, and long-term growth capabilities and may become a vessel for retirement savings.

Before you jump in, know the rules around 529 transfers to Roths, such as:

• Lifetime limit: There's a $ 35,000-lifetime limit for 529s to Roth IRAs.
• Annual limits: Transfers adhere to Roth IRA annual contribution limits.
• 15-year rule: 529 plans must be active for at least 15 years before becoming eligible for penalty-free transfers.
• Beneficiary match: The owner of the Roth IRA must be the same as the 529 plan beneficiary.
• Age restricts for withdraws: Roth IRA funds can't be withdrawn penalty-free until you're at least age 59 1/2.
• Income limits: Individuals must have a modified adjusted gross income (MAGI) of less than $161,000 in 2024 ($240,000 if filing jointly) to contribute to an IRA.

Consult a financial advisor before rolling your 529 plan into a Roth IRA to ensure this is a good option for you. Transferred funds into a Roth IRA can't be rolled back into a 529 without penalty.