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One of the exciting changes in recent tax law involves 529 plans and Roth IRAs—two powerful accounts for saving for the future.
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One of the exciting changes in recent tax law involves 529 plans and Roth IRAs—two powerful accounts for saving for the future. Clients have the ability to transfer unused 529 plan funds into a Roth IRA, opening up new possibilities for long-term financial planning.

What Are 529 Plans and Roth IRAs?

Before diving into the details of the new rule, let’s briefly review these two accounts:

  • 529 Plans: Designed for education savings, these accounts offer tax-deferred growth and tax-free withdrawals for qualified education expenses. They’ve long been a staple for families looking to fund college costs.
  • Roth IRAs: A Roth IRA is a retirement account where you contribute post-tax dollars, and your investments grow tax-free. Withdrawals in retirement are also tax-free, making it an attractive option for long-term savings.

The New 529-to-Roth IRA Transfer Option

Historically, one concern with 529 plans was what to do with leftover funds if the beneficiary didn’t use all of them for educational expenses. Fortunately, Congress recognized this and introduced a new provision allowing some 529 funds to be rolled into a Roth IRA.

Key Details of the Transfer Rule:

  1. Transfer Limits: Over a lifetime, you can transfer up to $35,000 from a 529 plan to a Roth IRA. This is a significant amount, but it does come with a few limitations.
  2. Requirements: To qualify for a transfer, the 529 plan must have been open for at least 15 years. Additionally, only contributions (and earnings on those contributions) made at least five years prior to the transfer are eligible.
  3. Beneficiary Transfers: The Roth IRA must be in the name of the 529 plan beneficiary. This means that the funds could potentially help your child or grandchild kick-start their retirement savings if they don’t use all of the 529 plan for educational purposes.
  4. Annual Roth Contribution Limits Apply: Each year, the transfer is subject to the Roth IRA contribution limit. For example, in 2024, the annual contribution limit is $7,000, meaning the transfer would be capped at that amount. This cap continues each year until the total $35,000 limit is reached.

Why This Matters for You

This new rule adds flexibility to 529 plans, making them more versatile than ever before. If you’re concerned about overfunding a 529 plan, this provision can ease those worries by allowing you to repurpose the funds for your beneficiary’s retirement—without any penalties.

It also means that the decision to contribute to a 529 plan carries less risk, as any unused funds aren’t wasted but can be transferred to a Roth IRA, benefiting from tax-free growth over a lifetime.

Written by: Timothy Moran, CFP®


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