Photo by Brooke Cagle on Unsplash
Yes. Well, sort of.
Let me explain.
529 College Savings Plans are a tax advantaged way to save for college. Contributions generally go into a 529 plan on a post-tax basis for the benefit of a beneficiary but grow tax deferred. Qualified distributions (aka money used for approved college related expenses) are tax free. Non-qualified distributions are taxable and may be subject to penalties as well.
(To learn more specific details about college savings plans and how they work, check out your state’s plan or these websites: MNSaves.org, SEC.gov, IRS Pub. 970)
But what happens if you don’t need or use all the money in your student’s 529 plan?
A number of options exist. Recent changes to the Secure Act added the option of using some or all of the 529 plan balance to fund future Roth IRA contributions.
Of course, there are some caveats. These are just a few:
- The Roth IRA must be in the name of the 529 plan beneficiary, not the owner, assuming they are two different people.
- The 529 plan must have been open for at least 15 years before the rollover takes place.
- Rollover amounts cannot include contributions made in the preceding 5-year period.
- The Roth IRA owner must have earned income that is equal to or greater than the amount of the 529-Roth rollover. For example, if the 529 beneficiary earned $5,000 at their job, they can only rollover $5,000 to their Roth from the 529 plan. Likewise, if they earned $50,000, they may rollover up to $6,500 in a single year.
- However, there are no income limits to either the 529 beneficiary or its owner.
- Rollover amounts are net of any contributions the Roth IRA owner may make on their own. In other words, you can’t rollover $6,500 and contribute an additional $6,500 in the same year.
- The lifetime maximum amount that can be rolled from a 529 plan to a Roth IRA is $35,000.
- 529 Rollovers are non-taxable.
This new feature of 529 plans becomes effective January 1, 2024. Some of the more nuanced details are likely to be hashed out by the IRS in the future.
To discuss any of the topics in this blog or to learn more about how we can help you Cross The Bridge To A Confident Retirement, please contact me through my web site mikebranch.net, call me directly at 651-379-3935 or email me at mpbranch@focusfinancial.com.