The term 529 plan is usually associated with education. However, thanks to the SECURE Act, you can now roll a portion into a Roth IRA on behalf of your child. It’s a big deal when you think about the benefits of the Roth IRA and the 529 plan. We’ll go through the details of each, the way the process works and what the impact could be on your child’s life.
What are a Roth IRA and a 529 plan?
- Tax-advantaged Education Accounts where the earnings are tax deferred.
- Distributions that are used to pay for eligible educational expenses are exempt from tax.
- You can use it for private K-12 schools up to $10,000 per annum and for college expenses indefinitely.
- You may be eligible for a state-tax deduction, depending on the state in which you reside and where you opened your account.
- Most 529 plans invest in mutual funds.
* Roth IRA
- Tax-deferred retirement accounts are those that offer tax advantages on earnings.
- All distributions are tax-free if you wait until the age of 59 1/2.
- You can withdraw contributions without penalty and tax if you have held them for at least five years.
- You can invest in stocks and bonds, mutual funds, ETFs, etc.
Can you Roll Funds from a 529 Plan into a Roth IRA
This law, also known as section 126 will come into effect on the 1st January 2024. There are some important things you should know.
- Transfers from a 529 Plan for a single beneficiary into a Roth IRA are limited to $35,000 per beneficiary.
- Transfers are limited by the annual contribution cap. You can transfer $6,500 per year up to the current limit of $35,000.
- The beneficiary of the Roth IRA must have earned the same amount as the amount rolled over from the 529 Plan. The child can transfer $5,000 from the 529 Plan even if they only earned $5,000. If the child made $40,000 they can only transfer $6.500.
- To convert a 529 plan into a Roth IRA, the plan must have been open for at least 15 years.
- Contributions or earnings from contributions made within the last five years cannot be rolled over to a Roth IRA.
How can you impact your child’s retirement plans?
| Scenario’s** | Projected Amount at Age 60* |
| Scenario 1– no additional contributions | $424,034 |
| Scenario 1 – Contribute $6,500 per year age 28-32 | $689,963 |
| Scenario 4 – Contribute $6,500 per year age 28-37 | $869,589 |
*Assumes annual return of 7%
** Assumes contributions of $2,500 at age 27 and $6,500 annually for ages 22-26.
There have been concerns in the past about the tax implications of withdrawing funds from a 529 Plan for expenses other than education. Parents have underfunded their 529 plans or saved in a different way to cover education costs. The numbers are clear: this new tax law makes it advantageous to fund a 529 education plan, and if you can, to overfund it, to help your child save for college, as well as jumpstarting their retirement savings.
