Eric Kipperman •
New for tax year 2024, there is an opportunity to roll over funds from a 529 plan to a qualified Roth IRA account. At this point, you may be scratching your head, wondering, ‘What is a 529 plan?’ Don’t worry, you are not alone. We are here to break it down for you.
New for tax year 2024, there is an opportunity to roll over funds from a 529 plan to a qualified Roth IRA account. At this point, you may be scratching your head, wondering, ‘What is a 529 plan?’ Don’t worry, you are not alone. We are here to break it down for you.
In essence, 529 plans are a unique type of investment plan that’s strategically designed to encourage individuals to save for the impending educational expenses of their children. The growth of the investment is tax-free, as long as the funds are used for qualified education expenditures. Picture this: your after-tax contributions are invested in ETFs, Mutual Funds, and other comparable investments within a 529 plan. This means that with proper planning strategies, you can grow your investment in the applicable 529 plan, and withdraw it without the burden of taxes to pay for qualified education expenses.
Now, the options have widened, as the utility of 529 plans expands further into the realm of the Roth IRA. If this sounds better than sliced bread, then pump the breaks because, yes, this is an amazing opportunity, but there are also some stipulations to get 529 funds into the Roth IRA. First off, the big kicker is that the 529 account needs to have been opened for 15 years, and the Roth IRA needs to be in the name of the beneficiary. Therefore, this roll over will not work for the last-minute taxpayer trying to landslide funds into their IRA on the eve of their retirement years. If there have been contributions made within the last 5 years, those specific contributions are ineligible for the rollover (2019-2024). The rollover does have a limit, and it is equivalent to the current year’s contribution limit ($6,500) minus the current year’s contributions. This means that if you roll over the maximum contribution from your 529 to your Roth, then you have hit the ceiling of contributions to an IRA account in the given year. The lifetime limit of the rollover is $35,000 per beneficiary, and the current year limit is the lesser of either the earned income of the beneficiary or the contribution limit. Any contribution over the annual gift tax exclusion counts against the taxpayer’s lifetime estate tax exclusion.
This rollover is a great resource for parents who are thinking about or beginning to start saving for their child’s education. With this rollover, taxpayers will be able to recover their after-tax monies without the distributions being non-qualified and accruing penalties.
Additional avenues of backdoor Roth rollovers, which can offer an advantageous option for individuals closer to retirement, may be a better option. A backdoor Roth conversion can be a great means by which a high-earning person can make a non-deductible contribution to a Traditional IRA and then convert the funds into a Roth IRA. If you are not sure about which options is best for you, contact your trusted accountant to discuss further.
There is no better time to start saving in a 529 plan than NOW, especially if the account has to be open for 15 years before the rollover can take place. Whether it is a lot or a little, saving for your child’s education should start NOW. With the ability to grow your funds in the 529 plan in the market, time is your friend. The further away you can set aside the money, the more opportunity there is for it to grow. Talk with your tax advisor to create a plan that works for YOU to save for your children’s education.
If you would like to learn more about the applications of 529 plans, read our comprehensive article about 529 plans for early education.
Now, the options have widened, as the utility of 529 plans expands further into the realm of the Roth IRA. If this sounds better than sliced bread, then pump the breaks because, yes, this is an amazing opportunity, but there are also some stipulations to get 529 funds into the Roth IRA. First off, the big kicker is that the 529 account needs to have been opened for 15 years, and the Roth IRA needs to be in the name of the beneficiary. Therefore, this roll over will not work for the last-minute taxpayer trying to landslide funds into their IRA on the eve of their retirement years. If there have been contributions made within the last 5 years, those specific contributions are ineligible for the rollover (2019-2024). The rollover does have a limit, and it is equivalent to the current year’s contribution limit ($6,500) minus the current year’s contributions. This means that if you roll over the maximum contribution from your 529 to your Roth, then you have hit the ceiling of contributions to an IRA account in the given year. The lifetime limit of the rollover is $35,000 per beneficiary, and the current year limit is the lesser of either the earned income of the beneficiary or the contribution limit. Any contribution over the annual gift tax exclusion counts against the taxpayer’s lifetime estate tax exclusion.
This rollover is a great resource for parents who are thinking about or beginning to start saving for their child’s education. With this rollover, taxpayers will be able to recover their after-tax monies without the distributions being non-qualified and accruing penalties.
Additional avenues of backdoor Roth rollovers, which can offer an advantageous option for individuals closer to retirement, may be a better option. A backdoor Roth conversion can be a great means by which a high-earning person can make a non-deductible contribution to a Traditional IRA and then convert the funds into a Roth IRA. If you are not sure about which options is best for you, contact your trusted accountant to discuss further.
There is no better time to start saving in a 529 plan than NOW, especially if the account has to be open for 15 years before the rollover can take place. Whether it is a lot or a little, saving for your child’s education should start NOW. With the ability to grow your funds in the 529 plan in the market, time is your friend. The further away you can set aside the money, the more opportunity there is for it to grow. Talk with your tax advisor to create a plan that works for YOU to save for your children’s education.
If you would like to learn more about the applications of 529 plans, read our comprehensive article about 529 plans for early education.