A 529 account rollover can seriously multiply in a child’s Roth IRA
SECURE Act 2.0 came with several exciting changes. One of the most beneficial changes is the ability to roll over 529 plans to a ROTH IRA. If you have children, this is an excellent way to save for their future retirement while taking advantage of certain tax benefits.
Under SECURE Act 2.0, taxpayers can transfer up to $35,000 from a 529 Savings Plan into a ROTH IRA on a tax-free basis, provided certain conditions are met. This means the money you contribute to your child’s ROTH IRA can grow tax-free over time, providing an excellent compounding opportunity.
Conditions for Rolling Over 529 Plans to Roth IRA
Although the SECURE Act 2.0 has made it easier to roll over 529 Plans, a few conditions still need to be met. The limitations are meant to ensure that the rollover is used for retirement purposes and not just to avoid tax liabilities. The regulator also wants to prevent mass rollovers of 529 plans, which can lead to a significant tax burden.
529 Savings Account Age
When the rollover plans take effect on January 1, 2024, your 529 Plan must have been open at least 15 years to be eligible for transfer. It's also important to note that any amounts contributed over the last 5 preceding tax years are not eligible for rolling over. Therefore, before initiating the transfer process, ensure your contribution is within the specified timeline. At the end of 2021, 529 accounts across the country held over $480 billion in assets.
What if you want to change the beneficiary of your 529 plan? In that case, there is one critical condition – the Roth IRA must be in the beneficiary’s name. If you want to switch from a parent-controlled 529 plan to a child-controlled Roth IRA, the new account must be under the child’s name.
Lifetime Maximum Rollover Limit
The maximum amount that can be rolled over from a 529 plan to a Roth IRA is $35,000. This amount is the lifetime limit for all transfer requests. So, if you decide to roll over your 529 plan several times, the total sum should not exceed $35,000. This cap is to prevent people from overusing the transfer provision.
The rollover process from a 529 to ROTH IRA provides an excellent compounding opportunity. The money you contribute to your child’s Roth IRA can grow tax-free over time, increasing the amount available to them during retirement.
Apart from that, the annual returns earned by your ROTH IRA can also be passed to the beneficiary tax-free, which makes it an attractive option for long-term savings.
The SECURE Act 2.0 provides an excellent opportunity for families to save for their children’s retirement. Many parents and guardians are caught at crossroads when they save for education, but the beneficiary chooses a different career path.
Transferring 529 plans to ROTH IRAs provides an avenue to repurpose the money and still benefit from tax-free growth and withdrawal of funds during retirement.
Neither MML Investors Services nor any of its subsidiaries, employees or agents are authorized to give legal or tax advice. Consult your own personal attorney, legal or tax counsel for advice on specific legal and tax matters. CRN202507-4148080