What You Should Know About 529-to-Roth IRA Rollovers

Education and retirement are two of the primary goals for most savings plans today. Workers or wage earners invest in retirement plans so that they can enjoy the years after their careers have ended. Savers also want to help the next generation pay for education and set the stage for success. As of this year, there is a new act that allows you to help yourself or your beneficiaries get a head start on both.

The Secure 2.0 Act

The Secure 2.0 Act, instated at the end of 2022, takes effect this year. One clause of this Act allows funds from an established 529 account to be transferred to a Roth IRA established in the name of the 529 beneficiary. Previously, 529 accounts were used exclusively to fund education costs, but now, leftover funds can be used to fund retirement tax-free. However, there are restrictions and limits to consider. Before determining if this is right for you, consider the specifics of each plan.

What is a 529 plan?

A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. There are two types of 529 plans, education savings and prepaid tuition.  Depending on the plan, 529 plan funds can be used for a variety of qualifying education expenses, including K-12 tuition, student housing, student loan debt, educational supplies, and trade school tuition.

529 plans offer appealing federal and state tax advantages. They also allow account holders to change investments up to two times per year. This flexibility, combined with the variety of approved uses, makes 529 plans a popular option for education savings.

What is a Roth IRA?

A Roth IRA is an individual retirement account. Unlike a traditional IRA, any contributions to a Roth IRA are made with after-tax dollars. This means that while you’ll pay taxes on your initial contributions, you won’t owe further taxes as your money grows, allowing you to withdraw tax-free when you’re ready to retire.

Roth IRAs are a popular option for savers who anticipate being in a higher tax bracket as they progress through their careers. These savers prefer to pay tax on today’s income rather than on retirement withdrawals. However, a Roth IRA does have income limits, so it’s not an available option for everyone.

529-to-Roth IRA Rollover Limits

As Secure 2.0 takes effect, savers may wonder how to best manage their 529 plan. Should they overfund their 529 plan with the intent to roll it into a Roth IRA in the future, and should they open a 529 or Roth IRA now in light of the new act. Before deciding, there are some general regulations and rollover limits that should be discussed with your savings advisor. They include:

  • You must have opened your 529 account at least 15 years ago. Opening a new 529 account today will not allow you to participate immediately.
  • The 529 account and the Roth IRA must have the same beneficiary. You cannot roll your own 529 plan into someone else’s Roth IRA.
  • Annual 529-to-Roth rollovers are subject to Roth IRA contribution limits. If you’re younger than 50, you can contribute up to $7,000 to your Roth IRA each year.
  • Rollovers from all 529 plans have a lifetime limit of $35,000. If you were to contribute the maximum rollover amount each year, you would reach your total limit within 5 years.
  • Rollovers may not exceed the amount you’ve contributed to the 529 account in the previous 5-year period. If you contributed $1,000 per year for the past five years, you may only roll over $5,000 in 2024.

Is a 529-to-Roth IRA Conversion Right for Me?

Even with the aforementioned limits and regulations, rolling excess 529 funds over into a Roth IRA can be a good financial choice for some individuals. This is just one part of a comprehensive strategy that helps you prepare well for the future. A seasoned financial advisor can help you with your rollover decision, but they can also help you manage investments, prepare for retirement, and more.

If you want a financial advisor who will truly partner with you to create a financial plan that fits your plans, goals, and dreams for the future, reach out to us at Marietta Wealth. As a fee-only wealth management firm, our focus is on you and your goals. Our experienced advisors can help you navigate the 529-to-Roth rollover process, along with other financial topics. We want to help you find the financial freedom to pursue your dreams, whatever they may be.

Give us a call or get in touch with us today.

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This article is not intended to be used, and should not be used, as the sole basis for legal advice.  The reader should seek and rely upon the guidance and advice of legal counsel before making decisions regarding any estate planning tools or documents.