529 Plan Funds can be rolled over into Roth IRAs

By Heidi King, College Inside Track

Tucked into the year-end federal spending package was a new provision allowing 529 Plan funds to be rolled over into Roth IRAs tax and penalty free.

This significant change takes effect in 2024. Here are the key details:

• The benefit is for 529 plan beneficiaries (as opposed to the custodians, or account owners)
• Rollovers are subject to Roth IRA annual contribution limits, which are currently $6,500, with an extra $1,000 catch-up contribution for those 50 and over
• Beneficiaries can roll over up to $35,000 total from 529 Plans into a Roth IRA over their lifetime
• The 529 Plan account must have been open for 15 years or more. (It is unclear whether changing account beneficiaries restarts the 15 year requirement)
• Beneficiaries cannot roll over contributions, or earnings on those contributions, made in the last 5 years

A 529 plan is a savings vehicle that offers tax-free earnings for college savers, as long as the funds are withdrawn for “qualified” educational expenses. Qualified expenses range from tuition, room and board, and even computer purchases, books, and supplies.

The earnings partition of “non-qualified” withdrawals is subject to a 10% penalty and possible local, state, and/or federal penalties.  

There had been minimal workarounds for money not used if a child doesn’t go to college or doesn’t need the full amount of the 529 accounts; this new legislation provides greater flexibility for these accounts.