Unused 529 Funds Can Be Rolled Into a Roth IRA

Certain conditions are met to transfer funds. Dreamstime/TCA

By Erin Bendig and Joy Taylor From Kiplinger’s Personal Finance

Question: Is it true that unused funds in a 529 college savings account can now be transferred to an individual retirement account (IRA)?

Answer: Yes, thanks to the SECURE 2.0 Act (SECURE refers to Setting Every Community Up for Retirement Enhancement), you’re now able to roll over funds from your 529 plan into a Roth IRA, if certain conditions are met.

According to the 2022 law, “Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.”

Here’s what you need to know about the changes, which took effect at the beginning of 2024:

• Your 529 savings account must be open for more than 15 years before funds can be rolled over into a Roth IRA.
• If the 529 beneficiary is different from the 529 holder, the Roth IRA must be in the beneficiary’s name.
• 529 contributions made within the preceding five years cannot be rolled over.
• The amount that beneficiaries of 529 college savings accounts can roll over to Roth IRA is $35,000 over the course of their lifetime. However, these rollovers are subject to Roth IRA annual contribution limits. IRA contribution limits for the 2024 tax year are $7,000 for people under 50, and $8,000 for people 50 and older.
• The beneficiary must have earned income for the year at least equal in amount to the Roth IRA contribution transferred from the 529 account.

By rolling over unused funds from a 529 account into a Roth IRA, individuals will now be able to avoid income tax and tax penalties that occur when withdrawing funds for non-education expenses. For this reason, we may now see more families opening 529 savings accounts.

Question: Is there still a tax break for teachers who use their own money to buy supplies for their classrooms?

Answer: Yes. Teachers can deduct up to $300 in 2024 for the cost of their unreimbursed expenses. This is an above-the-line deduction taken on Schedule 1 of the 1040, which means they don’t have to itemize on Schedule A to claim it. The cap is $600 for spouses who are both teachers and file a joint federal tax return.

Among eligible expenses: Professional development fees, books and supplies, materials for the classroom, computer software, and COVID-19 protective items.

Homeschooling parents don’t get the break. It’s available only to K-12 educators who work 900-plus hours during a school year in an elementary or secondary school.

©2024 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.

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