Rolling over leftover 529 funds into a Roth IRA is a new option provided by the SECURE Act 2.0, making these plans more attractive. Traditionally, if you didn’t use the funds for educational purposes, your only option was to transfer them to another beneficiary. Now, you can convert these funds into a Roth IRA without facing taxes or penalties, but there are specific rules you need to follow.
Starting in 2024, you can begin rolling over funds, but you can’t change the beneficiary in the Roth IRA, which aligns with the intent to benefit the designated person. The amount rolled over cannot exceed the annual Roth IRA contribution limits, which for 2023 are $6,500, or $7,500 for those 50 or older. Additionally, there’s a lifetime limit of $35,000 for these conversions.
Interestingly, the 529 plan must have been opened for at least 15 years to qualify for this rollover. This long duration underscores the importance of starting a 529 plan early—even with just a small initial deposit—to meet this requirement.
The introduction of this rollover option significantly enhances the value of 529 plans, encouraging contributions across all economic classes. For those who can afford it, maximizing contributions to a 529 could be wise, as the funds offer tax advantages and now more flexibility with the rollover option.
However, not everyone will find this option useful. If your children are likely to use all the allocated 529 funds for their education or if you’re planning to leave a substantial educational fund that exceeds the needs of one generation, the rollover benefit might not be as impactful. Only meticulous savers who manage to precisely match their contributions to educational needs plus a bit extra will find this truly beneficial.
This rollover option might not revolutionize financial planning, but it offers a new layer of flexibility for managing educational funds. It provides parents with another way to ensure their savings work effectively, whether for educational purposes or, eventually, as a retirement fund via a Roth IRA. For families starting to plan for future education costs, opening a 529 plan early can now be a strategic move, not just for education expenses but for long-term financial planning.
