529 to Roth IRA Rollover

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529 College Savings Plans are a useful tool that allows one to save after-tax dollars in an investment account that can benefit from tax-free growth if the proceeds are withdrawn for qualified education expenses such as K-12 private school, trade school, college or university tuition, higher education loans, and various other expenses. These Plans have existed for some time and have been popular for their tax-free growth features.

However, even with the various qualified education expense options, occasionally a balance may remain in the 529 investment after the intended beneficiary has finished their educational endeavors.  In such case, the 529 beneficiary can be changed to another sibling who may still be incurring college expenses, or even to a next generation.

Further, starting in 2024, the remaining balance of a 529 College Savings Plan can now be transferred, or rolled over, into a Roth IRA. This is a powerful tool in jumpstarting a loved one’s retirement savings. Imagine the tax-free growth on even a modest $10K deposit growing 15 years tax-free inside a 529, and then another 40 years through ones’ working career!

There are some restrictions to be mindful of. First, the 529 College Savings Plan must have existed for 15 years prior to being rolled over to a Roth IRA. Further, the Roth IRA rollover must come from funds that were made to the 529 at least five years before the transfer. Additionally, the current limit on the 529 to Roth IRA rollover is an aggregate of $35K, limited to the annual contribution limit in 2024 of $7K per year. There is speculation that the contribution limit may go up annually for inflation, but it’s not enough to game the system by overfunding a 529 with the intention of rolling a massive left-over balance to a Roth IRA.  This is truly a tax-efficient strategy for remaining 529 funds.

To find out more, meet with a Certified Financial Planner™ or CPA/PFS™ and explore this and other potential financial planning opportunities this year.

Bob Veres Insider Information

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