In a perfect world, you would know the amount needed for all your young scholars’ educational needs, and you would have that exact figure in a 529 plan. That’s not always realistic, however, as sometimes plans change and it’s hard to predict the exact figure needed for educational expenses. Thanks to the Secure Act 2.0, some of the worries surrounding overfunding 529 plans have been diminished. Starting in 2024, under certain conditions, 529 account holders can transfer up to a lifetime limit of $35,000 to a Roth IRA for the 529 plan beneficiary. But, of course, there are some restrictions and rules surrounding this exciting update:
- The 529 plan must have been maintained for more than 15 years. So, you are not allowed to just open a 529 account and immediately be eligible to do a rollover to a Roth IRA.
- The Roth IRA must be in the name of the 529 beneficiary; you are ineligible to send funds from a 529 plan for one beneficiary into a Roth IRA for someone other than the 529 plan beneficiary.
- Contributions made within the last five years (including earnings on those contributions) are not allowed to be used for this tax-free transfer. Unfortunately, you cannot deposit funds into a 529 plan and immediately transfer them to the beneficiary’s Roth IRA.
- You are capped at transferring the current maximum IRA contribution limit each year, and there is lifetime maximum of $35,000. For 2024, the maximum IRA contribution limit is $7,000 for someone under 50.
I know it’s tempting, but you cannot do the full $35,000 at once! You are capped at the lesser amount of either the 529 plan beneficiary’s earned income or the $7,000 max (for 2024).
