What can you do with money left over in a 529 plan?

You’ve planned well for your child’s or grandchild’s education by putting money- tax-free- into a 529 plan.

But what happens when something changes? Maybe there is more in there than you needed to cover the costs. Maybe your child received a scholarship. Or, perhaps, things changed with your child’s plans to pursue higher education.

We have some good news if you find yourself in this position. Recent changes now allow you to convert a 529 college savings plan into a Roth IRA. This means you can take steps today that could benefit your family’s financial health for years to come.

What’s the big deal?

In general, if you need to take a non-qualified distribution from a 529 plan, those distributions are subject to a 10% penalty. What’s more, you must pay both federal and state income taxes on the withdrawal.

The penalty and taxes limit your options when there is money left in the plan. However, now, you have the power to shift those funds into a Roth IRA, offering a new pathway to financial security. 

Like anything, however, there are stipulations.

How do you convert leftover funds in your 529 to a Roth IRA?

1. Check Eligibility

Not every 529 plan can turn into a Roth IRA. There are rules about how much, how often, and whose name can be on the Roth IRA. For example, the beneficiary of the 529 plan and the account holder for the Roth IRA must be the same name. 

2. Understand Limits

There’s a cap on how much you can convert each year, so planning is key. Currently, the maximum allowable contribution to a Roth IRA is $7,000 per year. 

According to the Secure Act 2.0, the total maximum amount that can be rolled over for qualified plans is $35,000. If you contribute $7,000 per year, you would achieve that maximum in 5 years.

3. Timing Matters 

The 529 plan needs to have been open for at least 15 years, and the timing of contributions impacts how much can be rolled into an IRA. Contributions made to the 529 plan in the past 5 years cannot be rolled over.

A Win-Win

For young adults not drowning in student loans, this conversion can kickstart their retirement savings, giving them a leg up in their financial journey. And for parents, it’s a flexible tool that adapts to your family’s evolving needs.

How We Can Help

At Harper & Company CPAs Plus, we’re not just about numbers. We’re about finding ways to make your financial dreams a reality. Converting a 529 plan to a Roth IRA is just one of many strategies we can help you navigate. Our team is ready to guide you through this process, ensuring you make the most out of every opportunity.

Interested in exploring how this change could benefit you and your loved ones? Let’s chat! Schedule a consultation today by calling (614) 456-7222.

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