Rollover Unused 529 Funds to a Roth IRA

The SECURE 2.0 Act continues to make an impact on how we plan for retirement, even for those who may be years away from retirement. Starting in 2024, 529 plan assets can be rolled over to a Roth IRA for the beneficiary after the account has been maintained for 15 years. Here are some of the specifics:

• There is an aggregate lifetime limit of $35,000.

• A rollover is treated as a contribution towards the annual Roth contribution limit.

• The annual contribution limit would be the beneficiary’s, not the parents.

• The amount transferred must have been contributed at least 5 years prior. Contributions and earnings made in the last 5 years are not eligible to be rolled over.

• The beneficiary must have earned income equal to the amount of the transfer.

• This is a great option for those who decide college is not for them.

Suppose you open a 529 plan for your child when she is 2 years old. You make your last contribution when she is 18, and she then decides she does not want to go to college. Her 529 plan has grown to $30,000. After waiting for 5 years, she decides to start the rollover process. Assuming the annual Roth IRA contribution limit stays at $7,000, here is how the rollover would work:

• From ages 23 to 26, she rolls $7,000 a year into a Roth IRA.

• At age 27, she can roll the remaining $2,000 to the Roth IRA.

• If she earns a 7% annual return, her Roth IRA would be worth $578,069 at age 67!

The IRS still needs to provide more guidance and it is unclear how states will view these rollovers for state income tax reporting purposes. But we all can agree that rolling over unused 529 plan funds into a Roth IRA provides a great start to retirement planning.