Your children have graduated college, started their first jobs, and are on their way to becoming financially independent. You realize that there are still funds left in the 529 account that you started for them 2 decades ago. But that money was for their education and you can’t move it without a penalty. What to do? Well, thanks to a new provision, you might be able to use leftover 529 funds to help them save for retirement as well.
Effective January 1, 2024, the IRS ruled that a distribution from a 529 account paid directly to a Roth IRA that was established for the 529 account’s beneficiary will be considered a Qualified Distribution and will be excluded from taxation, subject to certain restrictions.
The restrictions are as follows:
- The 529 account for the designated Beneficiary must have been maintained for at least 15 years;
- only contributions (and any associated earnings) made more than five years prior to the distribution are eligible for transfer (rollover);
- the amount eligible for transfer (rollover) each year cannot exceed the annual IRA contribution limit; and
- the aggregate amount of all such distributions from 529 plans to any Roth IRA for the designated Beneficiary for all taxable years cannot exceed $35,000.
So, what does this mean for you? Let’s say you started a 529 for your child when they were born. At 18, you started to use those funds to pay for their college education. Four years later, they have graduated but you still have money left in the 529 account. They have no plans for post-grad studies, and you have no other children that you can transfer the money to. What can you do? Well, your child can open a Roth IRA, in their name, and distributions can be made from the 529 to the Roth (see restrictions above). Bear in mind that your child, in the year of the rollover, must have income that is at least equal to the amount of the rollover.
As of the date of this article, the IRS has not clarified how a 529 account must be maintained in order to meet the 15-year requirement. That is to say, it’s unclear if a rollover from one 529 plan to another, a beneficiary change, or an account holder change would impact an account’s completion of the 15-year requirement. The IRS may issue additional guidance that may impact 529 rollovers to Roth IRAs, and you can reach out to your Financial Advisor for updates.
It’s our job to be aware of how changes to IRS rules and regulations can impact your investments. If you’ve got questions, give us a call. We are happy to help.