Can You Transfer Unused 529 Funds to a Roth IRA?
A college education is one of the most expensive parts of young adulthood – and over the years, the cost of higher education has only increased. Since many careers require a Bachelor’s degree or higher to advance the corporate ladder, you might have decided to set your child up for success with a 529 college savings plan.
But once you invest that money in your child’s 529 savings plan, is that all it can be used for? Do you have any options for unused 529 funds?
When a child does not use the entirety of their 529 for college expenses, that money can be repurposed for their future by transferring funds from the 529 to a Roth IRA.
Here’s what you need to know about this option, its rules and limitations, and other changes coming your way.
Can You Transfer Unused 529 Funds to a Roth IRA?
Parents want to do what they can to prepare their children for the future, and starting as early as possible is the best way to help a 529 account grow. If you’ve already maxed out your 401(k) and Roth IRA, contributing more to the 529 can be an excellent option.
But at the same time, that early into the child’s life, it’s impossible to know what the future has in store for them.
There are tons of reasons why a 529 plan might end up with excess funds. Some children may forgo the college experience, instead opting for other career paths. They may go to community colleges or simply aim for an Associate’s degree, cutting down the total amount of money they’ll need for tuition. They may even obtain scholarships that negate the need for tuition funding.
If you’ve already put money into a college savings plan, the good news is that you can now transfer unused 529 funds to a Roth IRA later on.
This transfer wasn’t always available, which was limiting for parents who were unsure of a child’s intentions for higher education. The SECURE Act 2.0 made the transition from 529 to a Roth IRA possible starting in 2024.
Transfer Rules and Limits
As with most financial changes, there are limits on what and how you make transfers from a 529 plan into a retirement savings account.
First, the 529 college savings plan must have been opened at least fifteen years ago.
Second, any transfer you make from a 529 plan to a Roth IRA is subject to the annual contribution limits for the IRA, which come in at $7,000 for 2024. You may not transfer more to the Roth than the sum of the total contributions to the 529 plan over the last five years.
Keep in mind that your Roth IRA contributions include more than just 529 savings plan rollovers. If a child makes a contribution to retirement via their employer (or because they are a money-savvy kid), that is less money that they can transfer from a college savings account.
Third, there’s a lifetime limit to how much you can transfer to a Roth IRA from a 529 savings plan – $35,000 for each individual.
If you have more than that in the 529 and don’t intend to use it for education, you have some options. You could take a taxable distribution, use it to pay off student loans for your child or your child’s siblings or roll it over into a new account for a family member.
How to Transfer Unused 529 Funds to a Roth IRA
If you’ve ever rolled over a 401(k) between an old and a new employer, the process is essentially the same. Start by contacting the plan administrators for your 529 and your Roth IRA, then follow their instructions down to the letter.
Most often, it requires filling out their forms or initiating the rollover via their online portal.
To make the process smoother, make sure you have all of the necessary details in front of you. You may need to open a Roth IRA at the brokerage of your choice before you can roll over those funds unless you already have an existing retirement savings account that meets the bill.
Other SECURE 2.0 Changes
With the SECURE Act 2.0, there are some substantial changes to retirement savings. In addition to the rollover from a 529 to a Roth IRA, the bill included several other incentives for employers and employees saving for retirement.
Next year, we can expect even more changes. For one, the Department of Labor will set up a Retirement Savings Lost and Found database that will allow you to search and find any of your old retirement plans. This makes it easier to locate money you might have otherwise thought was lost.
Additionally, there will be higher annual catch-up contributions for individuals between the ages of 60 and 63. Within a workplace plan, they can contribute up to an additional $10,000 annually.
Prepare for the Future with Consilio
The future is never certain, but planning for as many contingencies as possible can help you set your family up for success. If you’re not sure whether you’d be better off investing in a 529 plan or something else, the team at Consilio Wealth Advisors can help.
At Consilio, we’re CERTIFIED FINANCIAL PLANNERSTM who specialize in helping tech professionals from large companies like Amazon, Google, and Meta make the most of their compensation packages. We’ll dive into your specific situation and goals to identify which investment vehicles can help you achieve financial freedom and live the life you want.
If you’re ready to tackle the challenge of college savings and retirement savings for a beneficiary, reach out to Consilio today to learn more!
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