What You Should Know About Converting A 529 Saving Plan To A Roth IRA

529 plan

For people with children, a 529 College Savings Plan is a great, tax-advantaged way to get an early start on saving for your child’s education. But what if you save too much? Or what if your kids decide that college isn’t for them? What happens to all that money you saved? Well, prior to the passing of the Secure Act 2.0, you could withdraw that money, but you would have to pay taxes on the growth.

What a bummer.

But thanks to the Secure Act 2.0, all that is changing. Soon.

What is a 529 College Savings Plan

In case you don’t have children, but one day plan on it, 529 plans are a tax-advantaged way to save for a beneficiary’s education expenses. Sponsored by the state, these investment options allow you to withdraw funds tax-free to cover a wide range of college costs. Additionally, some plans may provide additional state or federal tax benefits.

529 Roth Conversion
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Converting A 529 College Savings Plan To A Roth IRA

With the passing of the Secure Act 2.0, beneficiaries of 529 plans are now able to roll over up to $35,000 from any 529 account in their lifetime. And that could be a game changer for your child’s future retirement.

This rollover is available starting in 2024 and is subject to annual Roth IRA limits, which are currently set at $6,500 with an extra $1,000 catch-up allowance for people over 50. To be eligible, the money has to have been in a 529 for at least 15 years.

The rollover is a great way to skirt income tax and penalties, as leftover money must stay in a 529 plan and be used toward qualified education expenses or else be withdrawn and charged a 10% penalty and federal income tax on the earnings. This new law can be a great incentive for people to invest in 529s, and it also opens the possibility of using the money for retirement planning.

However, there are restrictions to being able to convert the 529 money. For instance, there are age and grade limits for beneficiaries, and if the beneficiary decides to attend a private or out-of-state school, the funds may have to be converted to a dollar value before being used. Additionally, if the rollover is completed after the required minimum distributions (RMDs) are due, the Roth conversion will still be allowed, but the user may owe a few dollars in taxes.

The Secure Act 2.0 is a great gift for savers looking to make the most of their 529 money, and it can be a great way to fund retirement.

C. James

C. James is the managing editor at Wealth Gang. He has a degree in finance and a passion for creating passive income streams and wealth management.