Consider a Roth IRA Transfer

Prior to 2024, 529 Plan funds could only be used to pay for qualified expenses (e.g., tuition, books, computer, and room/board). If the account was overfunded, if a child received a full scholarship covering their cost of college, or if they decided not to attend college, there was no way to get the extra money out of the account without incurring a 10% penalty on the account’s earnings.

Now, beginning in 2024, a beneficiary of a 529 plan can now transfer the funds into a Roth Individual Retirement Account (IRA) without paying taxes or penalties.

529 accounts have been encouraging families with a tax-advantaged way to save for higher education expenses since the late 1980s. These accounts are usually sponsored by state governments and many states allow you to deduct your contributions on your state income tax return. The money can be withdrawn for qualified educational expenses without paying tax on any investment gains.

With beneficiaries able to roll over funds into a Roth IRA, the funds have the opportunity to benefit your child/grandchild later in life, becoming a valuable tool to transfer and build wealth over the long term.

It is Never Too Early to Start Saving

For parents or grandparents who want to fund an education and help their child or grandchild set aside money for retirement, a 529 Plan may be a smart solution. Speak with a Jemma Financial Advisor to determine if a 529 savings account is right for your family.

Key Points

• Total lifetime limit eligible for transfer from a 529 plan to a Roth IRA is $35,000 per beneficiary.
• A Roth IRA must be established in the name of the child or grandchild.
• Annual contribution limits apply to transfers. For 2024, the contribution limit for IRAs is $7,000.
• The 529 beneficiary receiving the transferred funds in a Roth IRA is subject to the same earned income requirement that applies to all IRA contributions. (To make an IRA contribution, you or your spouse must have earned income.)
• The account must be open for at least 15 years to be eligible for a rollover. Contributions and/or earnings made in the 529 plan during the last five years are not eligible to be transferred to a Roth IRA.