Rollover Provisions Starting in 2024
Americans with unused funds in a 529 college savings plan can transfer them to a Roth IRA in the same beneficiary's name without income taxes or penalties on the rollover beginning in 2024.
The Secure 2.0 Act permits these tax- and penalty-free rollovers from 529 plans to Roth IRAs. The 529 plan must have been open for at least 15 years, with a lifetime rollover maximum of $35,000 per beneficiary.
Contribution Limits and Restrictions
Transfers count toward annual Roth IRA contribution limits, which are $6,500 for 2023 or $7,500 for those ages 50 and over.
Contributions made to the 529 plan in the last five years do not qualify for these tax-free transfers.
Overview of 529 Plans
529 plans are savings accounts for educational expenses, where funds grow tax-free and allow tax-free withdrawals for qualified costs like tuition and required books.
Withdrawals for non-educational purposes previously incurred income taxes and a 10% penalty, treating transfers to a Roth IRA as non-qualified before this provision.
Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.
Roth IRA Basics
A Roth IRA provides tax-free growth on contributions and earnings, with qualified tax-free withdrawals available after age 59.5 and five years of account opening.
Unlike traditional IRAs, Roth IRAs do not allow tax-deductible contributions. Eligibility in 2023 requires modified adjusted gross income under $153,000 for single filers or $228,000 for joint filers, with phase-outs starting at $138,000 and $218,000 respectively.
Background on Secure 2.0 Act
Signed into law at the end of 2022 as part of a $1.7 trillion omnibus spending package, the Secure 2.0 Act builds on the 2019 Secure Act with changes to retirement savings, including this 529 provision effective in 2024.
