Putting money into a 529 Plan can be a very tax-efficient way to pay for future tuition for a child or grandchild (also known as the plan beneficiary). However, since 529 Plan rules allow for significant savings over multiple years, sometimes the child’s account ends up with more funds in it than they need for schooling because they benefit from scholarships or other student aid.
So what can you do with excess funds in a 529 Plan?
Typically, options include naming a new account owner, withdrawing the funds (and paying a penalty and income tax on the earnings), or leaving the funds in the 529 account in anticipation of some future education. However, there is a new option for those excess funds that you may not be aware of.
As of 2024, the SECURE 2.0 Act now includes a provision to allow 529 Plan holders to convert excess funds to a ROTH IRA. But before you attempt to convert these funds, please note there are a few requirements:
- The Roth IRA receiving the funds must be in the name of the 529 plan beneficiary. This can be a great way to help your child or grandchild start saving for retirement.
- The 529 plan must have been open for at least 15 years. This may necessitate waiting to initiate a conversion for a few years but remember those 529 Plan funds will continue to grow tax-free.
- The 529 funds you convert will count toward the plan beneficiary’s IRA annual contribution limit ($7,000 in 2025 if under the age of 50). You may need to coordinate with the plan beneficiary if he or she is already contributing to a Roth or Traditional IRA.
- The plan beneficiary must have eligible earnings when the 529 plan-to-Roth IRA conversions occur. In other words, earnings must be equal to or greater than the amount that is contributed to the Roth IRA.
- You can convert a maximum of $35,000 from a 529 Plan to a Roth IRA during the plan beneficiary’s lifetime. This may necessitate converting funds over multiple years.
- The 529 funds must be converted directly to a Roth IRA—you can’t receive the funds directly and then deposit the funds into the Roth IRA later.
- You cannot convert 529 contributions made within the past five years (or the earnings on those contributions). Again, this may encourage you to pause before converting the funds, allowing them to continue growing instead.
Although there are several requirements to consider before converting 529 Plan funds to a Roth IRA, it is also important to note that income limits for high-income earners do not apply to 529 conversions to a Roth IRA. Avoiding these Roth IRA income limits is a retirement-saving perk, but the rest of the rules for rolling over excess 529 funds are designed to ensure that 529 Plans are used for their intended purpose: education.
If you have a 529 Plan with unused funds and would like to consider converting those funds towards your child or grandchild’s retirement, contact CEP today at retirement@cepnet.com or 800-821-1112! We look forward to the opportunity to help you and your family.