Embracing the Future of Savings: Navigating 529 Plans and Roth IRAs

Thinking of Converting a 529 Plan to a Roth?

The journey of saving, particularly with an eye towards long-term goals such as education, demands a careful balancing act between present needs and future aspirations. This path, while marked by commitment, is often shadowed by uncertainties, especially when considering education savings plans like the 529 plan. A common concern that emerges is, “What happens if my loved one decides not to pursue college?”

The landscape of savings and investment underwent a significant transformation with the introduction of the SECURE 2.0 Act in 2022, which brings a compelling answer to the fore in 2024: the option to transfer savings from a 529 plan into a Roth IRA.

Crafting policies that support Americans in navigating their savings choices is no small feat for Congress. With the SECURE 2.0 Act, it has notably expanded the versatility of 529 plans—already adaptable through features like beneficiary changes and applicability to trade and apprenticeship programs—by introducing a groundbreaking pathway from saving for education to preparing for retirement.

This shift promises to redefine commitment to educational savings, yet it’s important to approach it with an understanding of certain limitations:

  • Time Considerations: For a 529-to-Roth rollover to be possible, the 529 account must have been active for at least 15 years. Additionally, contributions made in the last five years, along with their earnings, are ineligible for tax-free rollovers. Patience here is key, as delaying the rollover may be necessary.
  • Contribution Caps: Rollovers are limited by annual IRA contribution limits and a $35,000 lifetime cap. In 2024, for example, you could potentially roll over $7,000 from an unused 529 into a Roth IRA, leaving a substantial amount for future transfers.
  • Ownership Rules: The beneficiary of the 529 plan must be the same individual who owns the Roth IRA, ensuring the funds remain intended for the beneficiary’s future, regardless of how they’re used.
  • Income Requirements: As with any IRA contribution, the Roth IRA holder must have earned income at least equal to the rollover amount for that year.

State-specific treatment of 529 plans for tax purposes also varies, necessitating a review of any state tax benefits that might be affected by a 529-to-Roth conversion.

How does this apply in real life? Imagine a 529 beneficiary graduates at 22 with surplus funds in their 529, which was opened more than 15 years prior. Assuming they secure employment with a qualifying income, they could leverage this option to make substantial contributions to their Roth IRA early in their career, setting a powerful foundation for their retirement.

For my wife and me, navigating complex financial decisions is an annual ritual. Reflecting on my early career’s financial hurdles amplifies the value of prioritizing our daughters’ 529 plans. The possibility of contributing to their educational and retirement savings is a gratifying prospect, symbolizing a full-circle commitment to their financial well-being and future security.