In our last post about college planning, we explored the advantages of 529 savings plans for education costs. But what if the beneficiary doesn’t need all the funds? Can you convert unused 529 plan funds into a Roth IRA? Enter the 529-to-Roth IRA conversion—a new option introduced by the SECURE 2.0 Act that allows you to convert unused 529 funds into retirement savings, starting in 2024.
What are the rules for 529-to-Roth IRA conversions? In this post, we’ll dive into the key details you need to know about this new financial planning tool.
Key Details You Need to Know
- 15-Year Rule: The 529 account must have been open for at least 15 years to be eligible for conversion.
- Contribution Limits: Any contributions made within the last 5 years, and their earnings, cannot be converted. This helps ensure the plan isn’t exploited for immediate conversions.
- Lifetime Cap: A maximum of $35,000 can be transferred from a 529 plan to a Roth IRA over the beneficiary’s lifetime.
- Annual Contribution Limit: The amount converted each year counts toward the Roth IRA’s annual contribution limit, which is $7,000 (or $8,000 if you’re over 50) in 2024.
- Earned Income Requirement: The beneficiary must have earned income to complete the conversion. The amount transferred each year cannot exceed the beneficiary's earned income for that year. Without earned income, the conversion cannot proceed for that year.
- Beneficiary Ownership: The Roth IRA must be in the beneficiary's name—this means you can’t transfer the funds into your own retirement account unless you are the plan’s designated beneficiary.
Why This Matters
This conversion is a way to repurpose unused 529 funds for retirement, giving families an option to utilize the 529 funds for themselves. If there are concerns about overfunding a 529 plan, this new legislation to roll funds into a Roth IRA provides one way to alleviate those concerns.
If you have questions about these conversions or need guidance on the best approach for your situation, our team at WJ Interests is here to provide expert financial planning services and personalized solutions. Our vision is that every client lives a fulfilling life by making the most of their financial resources. We serve clients in Sugar Land, Fort Bend County, and the Greater Houston area and beyond.
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