Rolling Over a 529 Plan into a Roth IRA
Because of the cost of a college education and the plethora of viable career options for young people, many high school grads opt to go directly into the workforce or focus on a trade. According to the National Center for Education Statistics, college enrollment rates are on the decline. In 2012, 41% of 18- to 24-year-olds were enrolled in a college program, while ten years later, in 2022, that number dropped to 39%.
As a parent, all you want is for your child to be happy, so this isn’t “bad” news, but if you’ve been saving for their college education with a Minnesota 529 plan for years, their decision may leave you wondering, “Now what?” and scratching your head about what to do.
I’m here to tell you some good news! You have options, one of which is to roll that 529 plan into a Roth IRA.
What’s a Roth IRA?
An IRA literally stands for Individual Retirement Account and is a common vehicle for retirement savings. With a Roth IRA, you are able to save taxed funds (meaning there are no savings at the onset) into an account for the future.
A person can deposit funds into their Roth IRA until the age of 70-and-a-half, and funds can remain in the account for their entire life. Assuming the account holder has had the account for at least five years and is at least 59.5 years old, they can take funds out without additional taxing or penalty.
Why Convert a 529 to a Roth IRA?
Let’s say that after years of you saving and planning, your child opts not to go to college. Or perhaps they attended a program but didn’t use every dollar of the 529. If that happens, you can roll that tax-free savings into a Roth IRA for them!
There are a few restrictions. First, you must have owned the 529 plan for at least 15 years before funds can be rolled over. Plus, any contributions made in the last five years before distributions began (including any earnings) are not eligible to be rolled over.
Using 529 funds on non-education expenses incurs a penalty, so it’s a great idea to roll over the savings to help your child get started with a retirement account at a young age.
How Can I Get Started?
I am excited about this new flexibility in the regulation of 529 plans! My team and I can help navigate this rollover, or explore other options with you. Just reach out today and make an appointment. Together, we can map out the best path for you and your young adult.
Participation in a 529 Education Savings Plan (529 Plan) does not guarantee that contributions and investment return on contributions, if any, will be adequate to cover future tuition and other education expenses or that a beneficiary will be admitted to or permitted to continue to attend an educational institution. Contributors to the program assume all investment risk, including potential loss of principal and liability for penalties such as those levied for non-educational withdrawals. Check with your state’s guidelines prior to withdrawing the funds. An investor should consider, before investing, whether the investor's or designated beneficiary’s home state offers any favorable state tax treatment or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Consult with your financial, tax or other adviser to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. For more complete information, including a description of fees, expenses and risks, see the offering statement or program description
