By Terri Ritchie, CFP®
Since they were initiated in 1996, 529 plans have been heavily utilized. Considered to be one of the most efficient and tax-effective ways to save for a child’s college education, the 529 plan has been extremely successful for many families and individuals. The state-sponsored investment account offers tax-free earnings on investments if put towards tuition and other qualified educational expenses. That being said the rules on 529 plans are strict. One important consideration, and possible roadblock for many families, has been what to do with the excess or unused funds in a 529 plan.
There is good news, as part of the SECURE 2.0 ACT, Congress has addressed this major roadblock of unused 529 funds that has hindered so many and which can be an invaluable asset to a child’s foundation to financial freedom during retirement. Of course, there are limitations, but as of January 1st, 2024, unused assets in a 529 plan can be rolled into the beneficiary’s Roth IRA account without a tax penalty. Over the past couple of years, we have seen the parameters of the 529 Plan loosen to allow more flexibility.
529 funds can now go towards tuition for K-72, continuing education, apprenticeships, and go towards student loan debt of up to $10,000. There are some important limitations to carefully consider before initiating a rollover:
- Ownership – The owner of the Roth IRA must be the same as the beneficiary of the 529 In addition, the account owner must be eligible to contribute to a Roth and have earned income at least equal to the amount of the rollover for that year.
- Contribution Limits – There is a lifetime cap of $35,000 for a 529-to Roth IRA rollover. In addition, your rollover cannot exceed the annual Roth IRA contribution limit which for 2024 is $7,000 for those aged 50 years and So, if you wanted to rollover the lifetime contribution amount, it would take a number of years to do so.
- Holding Periods – To execute a rollover into a Roth IRA from a 529, the 529 account must have been opened for a minimum of 5 years. In addition, the rollover amount must have been in the 529 for at least a minimum of 5 years.
There are additional options for consideration as well should you have unused 529 balances. To learn more about the 529-to-Roth Conversion, or additional alternatives, please call our office at 813-963-0502 and ask to speak to our Prosperity Advisor team.
Terri Ritchie, CFP® Sr. Vice President, Sr.
Terri Ritchie joined Suncoast Equity Management (SEM) in August 2019. Terri has more than 16 years experience in the financial services industry, both in client-facing roles, as well as management. She most recently joins us from Morgan Stanley where she was a Vice President/Complex Business Service Officer and managed the operations department for Morgan Stanley’s Virtual Advisor platform. She also spent 6 years at Wells Fargo Advisors where she worked as a Client Service Associate. Terri worked closely with clients and adopted a holistic approach to investing.
Terri graduated, with honors, from the University of Florida with a Bachelor of Science in Finance and Marketing. Terri currently holds her Series 65 license. She is also a Notary Public.
