Maximizing Savings: How Families Can Seamlessly Transfer 529 Account Funds to a Roth IRA

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Maximizing Savings: How Families Can Seamlessly Transfer 529 Account Funds to a Roth IRA

By Larry Van Quathem, CFP®

For years, the 529 plan was the go-to option for parents who wanted to build a college savings fund for their children. However, these plans had a major shortfall: they limited how beneficiaries could use any remaining balance. Enter the 529 rollover, a new provision that gives plan beneficiaries more control over their funds.

As of 2024, the 529 rollover provision will enter into force, and it could potentially reshape how you and your children approach saving for higher education. Let’s discuss the intricacies of this major change. 

The Basics of the 529 Rollover

First of all, a 529 plan is a tax-advantaged savings plan that was created to help parents save for their child’s future education costs. Also called “qualified tuition plans,” 529 plans are sponsored by education institutions or state agencies and are authorized under Internal Revenue Code Section 529. The beneficiary (i.e., your college student) can use the funds for authorized expenses like tuition, books, rooming costs, etc. 

But what happens if they don’t use all the 529 plan funds for college? Thanks to the SECURE 2.0 Act, you and your child can take advantage of a 529 rollover. The provision goes into effect in 2024. The 529 rollover provision allows the beneficiary to transfer 529 plan funds to a Roth IRA, a retirement savings account. 

However, there are a few conditions and limits you need to know about:

  1. Duration of the 529 Plan: The 529 plan must have been open for at least 15 years.
  2. Lifetime Limit: Each beneficiary has a lifetime rollover limit of $35,000, meaning your child can’t transfer more than this amount to a Roth IRA.
  3. Roth IRA Beneficiary: The Roth IRA and 529 plan have to be in the same name (your child’s).
  4. Exclusion of Recent Contributions: Any contributions made in the last five years (and their earnings) cannot be rolled over.
  5. Annual Limit: The amount you can roll over annually is tethered to the IRA contribution limit. The Roth IRA limit in 2024 is $7,000.
  6. Income Limitations: Plan beneficiaries won’t be subject to usual income limitations. 

Overall, the 529 rollover provision will encompass the majority of plans and beneficiaries. However, familiarizing yourself with the above requirements and limitations can help you and your college student decide whether or not it’s the right option for you. 

Why Would You Consider a 529 Rollover to a Roth IRA?

Suppose you’ve saved diligently in a 529 plan to cover your child’s higher-education expenses…but they snagged a full ride or chose an alternative path. You can schedule non-educational withdrawals from the 529, however, you’ll face some heavy penalties. 

The 529 rollover provides an alternative option. Your child can move up to $35,000 into their own Roth IRA, avoid penalties, and start saving for retirement; and taking advantage of this new provision is easier than you might expect. 

First, check your eligibility by reviewing your 529 plan. Then set up a Roth IRA in the beneficiary’s name. Finally, initiate the rollover. Keep in mind that it will take five years or more to reach the $35,000 lifetime contribution limit due to annual Roth IRA contribution caps. But with a little diligence, you can take advantage of this provision and jump-start your child’s retirement savings journey.

Benefits of the 529 Rollover

While college expenses continue to rise, there is a chance that your child’s 529 plan will have a leftover balance, especially if you start saving early. The 529 rollover provision gives your child a chance to put that remaining balance to use toward their own retirement savings. 

Although 529 rollover contributions count toward their annual contribution cap, this provision encourages younger individuals (such as those who just graduated from college) to start planning for retirement sooner. Overall, the 529 rollover provision can be a great addition to the toolbox of retirement planning and savings instruments. 

We’re Here to Help

Do you have questions about the 529 rollover provision or financial management in general? If so, the team at ABLE Financial Group is here to help! It’s our mission to help you map your financial future with confidence and to put you (and your family) first, always.

To learn more about our team and the ways we can help guide you, call 480.258.6108 or email adam@ablefinancialgroup.com today.

About Larry 

Larry Van Quathem is an Arizona native who grew up in the financial services industry, as his father, Bob, became a Financial Consultant for Merrill Lynch when Larry was just seven years old. After earning a Bachelor of Science in Finance from the University of Arizona in 1993, Larry followed in his father’s footsteps just two years later. They worked together for more than a decade before Bob retired in 2009, and after gaining 20 years of experience at Merrill Lynch, Larry joined ABLE Financial Group in 2015. He saw it as a great opportunity to increase the quality of service for his clients and to have more control over how that service is delivered.

As a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional, Larry excels at listening to each client’s personal goals and then offering various approaches to help achieve those goals using a written plan of action. He creates a personalized service model for every client, enabling him to serve as a financial coach for his clients and make sure they are taking appropriate action to help reach their investment objectives and life goals.

Larry also likes to spend his time getting involved in the community, and he is currently serving on the Board of Governors for the Boys and Girls Club of Scottsdale.  In the past, he has served on the Board of Delta Sigma Pi Leadership Foundation, the Board of Directors for the Association for Supportive Child Care and he is a past active member of the Scottsdale 20-30 club. Professionally, Larry has been a member of the Central Arizona Estate Planning Council since 2010. Larry lives in Phoenix with his son Jake. When he is not busy servicing his clients, he enjoys golf and playing with his French Bulldogs Rocky and Birdie.

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