August 24th, 2024
Recent Changes Allowing 529 Plan Rollover to Roth IRA
Posted in: Estates, Trusts & Probate Tax Law Tagged: Michelle L. Vesole
Author: Michelle L. Vesole
Did you know that you that can roll over your 529 plan to a Roth IRA? As of January 1, 2024, funds in a 529 plan may be distributed to a Roth IRA for the benefit of the 529 plan beneficiary, if eligible.
Are You Eligible?
To be eligible for a rollover you must meet the following requirements:
- The 529 plan must be maintained for at least 15 years prior to the distribution to the Roth IRA. There is some discrepancy if changing the designated beneficiary restarts the 15-year clock.
- The distribution to the Roth IRA cannot exceed the aggregate amount contributed to the 529 plan (including earnings on such contributions) before the five years prior to the distribution to the Roth IRA. In other words, if you added money to the 529 plan within the last five years, you can’t include that recent money in the rollover to the Roth IRA.
- The distribution must be paid directly from the 529 plan to the Roth IRA.
- Distributions (from the 529 plan and from the beneficiary combined) must not exceed the annual contribution limit for Roth IRAs ($7,000 in 2024; $8,000 for age 50+).
- The total distributions from a 529 plan to a Roth IRA must not exceed a lifetime limit of $35,000.
- The designated beneficiary must have earned at least as much money through work in that year as the amount being transferred from the 529 plan to the Roth IRA. But the designated beneficiary is not subject to the income limitations typically required for eligibility to make Roth IRA contributions.
Does This Make Sense for You?
Prior to this new law, you or any beneficiaries who used the funds in a 529 plan for nonqualified expenses – that is, expenses not used for higher education, apprenticeship programs, interest and/or principal on qualified education loans – had to pay income tax on any earnings associated with the funds withdrawn from the 529 plan. You would also have to pay a 10% federal tax penalty. The rollover to a Roth IRA may make sense for you if you currently have funds sitting in a 529 plan that you do not plan to use for higher education expenses.
The History
In December 2022, the SECURE 2.0 Act was signed into law as part of the Consolidated Appropriations Act of 2023 (CAA). The law, which stands for Setting Every Community Up for Retirement Enhancement Act (SECURE), allows for changes to retirement plans including automatic enrollment to 401(k) plans, updates to the required minimum distributions, and using earnings and contributions from a 529 plan to rollover into a Roth IRA without a tax penalty under certain conditions.
While some states do not look at 529 plan rollovers and withdrawals as a qualified expense, Maryland, Virginia, and the District of Columbia all treat Roth IRA rollovers as qualified expenses.
If you have any questions about a 529 plan rollover to a Roth IRA or the SECURE Act 2.0 and how it impacts you, please contact an attorney in our estates and trusts department.
