If you have leftover money in a 529 plan, you might want to consider converting it to a Roth IRA. This is now possible, thanks to the Secure Act 2.0, which passed in December 2022.
The new rules will go into effect in 2024, allowing you to move up to $35,000 from the beneficiary of your 529 plan to a Roth IRA account in their name.
This article will explain the details of the conversion and provide you with the necessary information to make an informed decision.
What is a 529 Plan?
Before diving into the specifics of the conversion, let’s first review what a 529 plan is. A 529 plan is a tax-advantaged savings plan that helps families save for future college expenses.
Contributions to these plans grow tax-free, and withdrawals used for qualified education expenses are also tax-free.
However, if you withdraw the funds for non-qualified expenses, you will be subject to income tax and a 10% penalty on any earnings.
Introducing The Secure Act 2.0
The Secure Act 2.0 allows you to move the leftover funds in a 529 plan to a Roth IRA account in the name of the beneficiary. This is a great option for individuals who have money left over in their 529 plan and are unsure of what to do with it.
Instead of paying taxes and penalties on the growth, you can now convert it to a Roth IRA account to help with retirement planning.
Important Rules To Note
It’s important to note that the 529 account has to have been established for at least 15 years.
Also, the conversion will be subject to the contribution limits of a Roth IRA account, which is $6,500 per year if you’re under the age of 50, and $7,500 per year if you’re 50 or older. You’ll also need to have earned income to make a contribution to a Roth IRA.
It’s worth mentioning that there are no income restrictions on this conversion. This means that regardless of your income, you can still convert the funds from your 529 plan to a Roth IRA account.
Lastly, the Secure Act 2.0 allows you to move up to $35,000 cumulative over your lifetime. This changes the way you might think about contributing to a 529 plan.
Instead of overfunding it, you can now consider contributing what you need for college expenses and converting the rest to a Roth IRA to help with retirement planning.
Final Thoughts
The Secure Act 2.0 has created a new option for individuals with leftover funds in their 529 plans.
Converting these funds to a Roth IRA account can be a great opportunity for younger individuals to jump-start their retirement planning.
As with any financial decision, it’s important to weigh the pros and cons and consult with a financial advisor before making any moves.
