Transfer Your Unused 529 Account Money to Your Retirement Account

Shutterstock

Putting money into a 529 plan for a family member or loved one’s education can help them get an education. The account builds interest and can be withdrawn tax-free when needed for college expenses. Any unused funds can be rolled over later into a retirement plan.

Although the 529 fund originally was for college costs, it later included K–12 and apprenticeship programs. You can purchase 529 plans from the state, a financial advisor, or a broker.

Because states control 529 plans, the rules for each may differ from one state to another, but all states and the District of Columbia have them. Transfers from a 529 plan in one state can be made to another state’s 529 plan—but only once within 12 months.

Contribution Limits to a 529 Plan

States do not have yearly contribution limits on 529 plans. Instead, they may have a total limit to the contributions you can make to the plan, such as $300,000, which will vary by state. Other people can also make contributions to the plan.

In the past, before SECURE 2.0 (Setting Every Community Up for Retirement Enhancement), money in a 529 account could not be withdrawn without penalties unless used for education in some way. If a child or grandchild won a scholarship, chose not to go to college, or did not finish, the money was stuck in the account. Now, there are some options.

Requirements for a Rollover

Starting in 2024 unused money in a 529 account can be rolled over into a Roth IRA (individual retirement account) without paying the 10 percent penalty. The rollover is not subject to federal income taxes, and most states will not require income taxes on the money either. The account must have existed for 15 years before you can roll over any money.

Also, you can only roll over the account money to a beneficiary’s account. Finance.Yahoo says a lifetime maximum of $35,000 can be rolled into a Roth IRA.

One more rule about the rollover, Forbes says, is that any money transferred from the 529 college fund must have been in the account for at least five years.

IRA Contribution Limits

If you are considering making such a transfer, remember that there are also contribution limits to an IRA. In 2024, Investopedia says the contribution limits are $7,000 unless you are 50 or older—then you can contribute up to $8,000. If you were to transfer all the $35,000 without any penalties, it would take a minimum of five years.

The contribution limits to an IRA must include contributions from all sources. If the child or grandchild contributes $3,000 to the IRA, all other contributions must be limited to $4,000, or you will owe a penalty.

A transfer to a Roth IRA can be beneficial to a child or grandchild. Once the money is in a Roth IRA, they can withdraw up to $10,000—without a penalty—to buy a house. It can also get them started with retirement savings.

Tax Benefits of a 529 College Savings Plan

Contributions to a 529 college fund are after tax, which means you do not get a tax break on them. The money grows tax-free, and money withdrawn for education is also tax-free on federal income tax forms.

Beneficiary Rules

The rules for beneficiaries are generous. You can name anyone as the beneficiary, including yourself. If you opened the account, BusinessInsider says you can change the beneficiaries whenever you want—and even add yourself to the list.

Before rolling over any money into a Roth IRA, both accounts must be owned by the same person. The beneficiary of the 529 plan must also be the owner of the Roth IRA.

A rollover can give you access to some of the unused money once it is in your retirement account. It can be very useful if there is only one other beneficiary and you have more than $35,000 in the 529 account.

Roth IRAs Have Income Limits

If you are a high-income earner, you cannot contribute to a Roth IRA. Individuals with a modified adjusted gross income of $161,000 or more in 2024, or $240,000 or more if filing jointly, cannot contribute to an IRA.

There is an exception to this rule. SavingforCollege says that people of any income level can transfer money from a 529 plan to a Roth IRA, but other contributions are not allowed.

Withdrawing Money for Non-Qualified Expenses

If you own a 529 plan or are a beneficiary, you can withdraw money from the account whenever you want. Every expense is either qualified or non-qualified.

SavingforCollege mentions that you will owe income taxes on any money withdrawn for unqualified expenses, plus an additional 10 percent penalty. Some states may have additional penalties, including the possibility of paying income taxes on money already received from the account. Some exceptions may apply.

Leaving Money in the Account

There are no limits on how long you can leave money in a 529 account. It can continue to grow as long as you want, but it must always have a living beneficiary.

Some aspects of the new ruling about these transfers have not been ironed out. Congress still has some work before them to make more clarifications. It means your plan manager may be hesitant to make the transfer—and may not be aware it is possible.

You may want to open Roth IRA accounts for multiple children (or others) to help more than one get started with a retirement account if you have significant funds tied up in a 529 account. Talk to a financial advisor before making any transfers or to answer any further questions about rollovers.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.