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Investing in a 529 plan can be a great way to fund a child’s or grandchild’s education, but what if your loved one doesn’t spend all the funds in the account? Beginning in 2024, the SECURE 2.0 Act allows 529 plan owners to roll over funds from a 529 to a beneficiary’s Roth IRA up to a certain dollar amount tax and penalty free.¹ While there are still some questions remaining and additional guidance needed from the IRS, it’s worth considering and reaching out to your wealth advisor and tax professional to evaluate the potential opportunity.

Solution for Unused 529 Funds

Prior to the SECURE 2.0 Act, the options for 529 accounts with unused funds included saving the money for additional education, such as graduate school, transferring it to another family member’s 529 plan or making a nonqualified withdrawal that would be subject to income tax and penalty. Now, 529 beneficiaries can transform their unused education funds to jump-start retirement savings.

How the Rollover Works

An owner of a 529 plan or its beneficiaries can roll over a federal lifetime limit of $35,000 per beneficiary into a Roth IRA, but not all at once. The annual rollover limit is the same as the annual IRA contribution limit, which is $7,000 for 2024.² The Roth IRA must be in the same name as the 529 beneficiary. Roth IRAs grow tax deferred and withdrawals are tax and penalty free if specific requirements are met.*

The Fine Print

To qualify for the rollover, the Roth IRA beneficiary must have earned income—meaning they need to be working. The eligible rollover amount for a given year is the lesser of earned income or the IRA contribution limit. Note that the inability of high earners who earn too much to make Roth IRA contributions does not apply to rollovers from a 529 plan to a Roth IRA.

Other key points: The 529 account with funds that are being rolled over into a Roth IRA must have been open for at least 15 years. Contributions made within the past five years, along with earnings from those contributions, aren’t eligible. Rolled-over funds can’t go through your hands, which means rather than receiving a check from your 529 plan and depositing it in the Roth IRA, the transfer must be made plan to plan or trustee to trustee.

IRA Contribution Math

Also bear in mind that Roth IRA contributions or rollovers separate from a 529 rollover count toward the total annual contribution ceiling. That means, for example, if the beneficiary has already contributed $3,000 to a Roth IRA in 2024, you can only roll over an additional $4,000 from your 529 account. This annual limitation means that getting to the lifetime limit may take a few years.

Unclear Guidance for States

While 529 plan managers are waiting for guidance on rules for these transfers, it’s unclear at this time whether all states will treat these rollovers as a qualified expense for state income tax purposes.

Not all states follow the federal definition of qualified expenses for 529 plans. In states that don’t, state tax penalties could occur with a 529-to-Roth IRA rollover. Some states will need to update laws to include these rollovers as a qualified expense, while other states may choose not to update their laws.

When evaluating this opportunity, understanding the state tax rules will be important.

Worry-Free Giving

With education costs rising fast, maximizing the funding of your child’s or grandchild’s 529 can be a smart decision. And you can now do so with a little less worry. Thanks to the new Roth IRA rollover rule, leftover funds in the 529 account can be a good problem for the beneficiary. Don’t hesitate to contact your wealth advisor with any questions.

Sources:

¹“Instructions for Forms 1099-R and 5498 (2023)”

²“401(k) limit increases to $23,000 for 2024, IRA limit rises to $7,000“

*A distribution from a Roth IRA is tax free and penalty free, provided the five-year aging requirement has been satisfied and one of the following conditions is met: age 59½, disability, qualified first-time home purchase or death.

The views expressed regarding IRA Rollovers and 529 plans are for educational purposes only and do not consider individual personal, financial, or tax considerations. It is not intended to be personalized advice or a solicitation to engage in a particular investment strategy. Before initiating any financial strategy, please consult with a professional and ensure you consider all your available options, including applicable fees and features.

Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about specific 529 plans is available in each issuer’s official statement, which should be read carefully before investing.

Investing involves risk, including the potential loss of principal.

Mariner Wealth Advisors (“MWA”) is an SEC registered investment adviser with its principal place of business in the State of Kansas. Registration of an investment adviser does not imply a certain level of skill or training. MWA is in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which MWA maintains clients. MWA may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Any subsequent, direct communication by MWA with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For additional information about MWA, including fees and services, please contact MWA or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you invest or send money.