Starting in 2024, unused funds in a 529 education savings plan can be rolled over tax- and penalty-free into a Roth IRA for the same beneficiary, up to a $35,000 lifetime limit. This gives families more flexibility if the beneficiary doesn’t use all the 529 money for qualified education expenses.

Who can benefit:

If the beneficiary finishes school early, gets scholarships, attends a cheaper institution, or decides not to pursue higher education, leftover 529 funds can still be put to good use by boosting retirement savings.

Conditions you must meet:

• 15-year rule: The 529 plan must have been maintained for the beneficiary for at least 15 years.

• Five-year seasoning: The transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date and the aggregate amounts transferred from 529 accounts to all Roth IRAs must not exceed $35,000 per beneficiary.

• Same beneficiary: The Roth IRA must be owned by the same person who is the beneficiary of the 529 plan. You can change the beneficiary of the 529 account to another eligible individual, such as a child, grandchild, or eligible relative to fund an education. However, if the child is in a younger generation than the original designated beneficiary, the funds may be considered a gift for tax purposes. You should consult with a tax professional regarding your specific circumstances.

• Annual limits: Each year, the amount rolled over (combined with any regular IRA contributions) can’t exceed the annual Roth IRA contribution limit for that year (e.g., around $7,000 for many beneficiaries).

• IRA contributions may require sufficient earned income. At this time, it is unclear if sufficient earned income would be applicable for 529 conversions to Roth IRAs. The IRS has not issued guidance on this legislation but is anticipated to do so in the future, which may result in interpretative changes. It's always best to consult with a financial or tax professional regarding your specific circumstances.

Why this matters:

Traditionally, withdrawing 529 funds for non-education use would trigger income tax and a 10% penalty on earnings. This rollover option helps avoid those penalties while letting the money grow tax-free in a Roth IRA. Because the annual amount you can roll over is limited by IRA contribution limits, fully using the $35,000 cap typically takes several years.

Bottom line:

Unused 529 savings don’t have to go to waste. With this new rollover option, beneficiaries can transfer up to $35,000 to a Roth IRA over their lifetime under the right conditions, turning education savings into retirement savings while avoiding tax penalties.

To learn more download our Can I Make A 529-To-Roth IRA Transfer Flowchart.

Source: https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth

Have questions about how these insights and ideas could impact your personalized wealth management strategy? Let’s talk.

This communication is for information and educational purposes only. This is not a recommendation for the sale or investment in any product or strategy or to be perceived as individual advice. Information presented has been prepared from sources believed to be reliable but is not guaranteed and does not represent all available data necessary for making investment decisions. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. Forecasts do not consider the specific investment objectives, restrictions, tax and financial situation or other needs of an individual. Actual data will vary and may not be reflected here. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. The opinion expressed by this individual is based on facts and circumstances known at this time, is subject to change and does not reflect the opinions of all financial professionals of XML.