For those who do not know, a 529 account is a state offered Education Savings Investment Account that allows you to save for the costs of higher eduction. This is a triple-tax advantaged account. Your contributions are state-tax deductible, earnings grow tax-free, and your distributions are tax-free ONLY if you use the money for educational expenses ranging from tuition costs to books to your dorm room rent. Your A 529 account can be for your self, your children, or another family member.
Not all 529 accounts are the same and they each have their own limits and benefits. For example, the Pennsylvania 529 account allows you to open and contribute to the account even if you don’t live in Pennsylvania. The same goes for Utah and a few others. If you have a PA 529 and decide to go to state college in Pennsylvania, you will get a discount on your college tuition. Each 529 has its own maximum annual contributions and overall maximum balance. If you would like to learn more, read “Saving for college with a 529” or check out “What happens to the money leftover in a 529?”.
Here is what my 529 provider mailed me earlier this week.
“Effective January 1st, 2024, Account Owners are permitted to transfer funds from their PA 529 IP Account into a Roth Individual Retirement Account (Roth IRA) without incurring federal income tax of penalties subject to the following conditions:
- Your PA 529 IP Account must be open for 15 or more years.
- Contributions and associated earnings that you transfer to the Roth IRA must be in your PA 529 IP account for more than 5 years.
- IRS regulations permit a lifetime maximum amount of $35,000 per designated beneficiary to be rolled over from all 529 accounts to Roth IRAs.
- The Beneficiary of your PA 529 IP Account from which funds are being rolled over must be the beneficiary of the Roth IRA into which the rollover is occurring.
- PA 529 IP Account assets must be sent directly to the Roth IRA.
- The Roth IRA contribution is subject to the Roth IRA contribution limit for the taxable year applicable to the designated beneficiary for all individual retirement plans maintained for the benefit for the designated beneficiary.”
THIS IS A BIG DEAL
Before 2024, if you no longer needed your 529 for education expenses, you only had two options. You could incur the 10% penalty fee and pay taxes on your distributions, or you could change the beneficiary to someone else in your family who could still use that money for education. With this new change for 2024, you can now rollover your 529 into your Roth IRA.
The Roth IRA is one of the best retirement investing accounts because the growth and distributions are tax-free. They are tax-free because you already paid taxes on your contributions. The average 20-something year old who maxes out their Roth IRA every single year will have an estimated Roth IRA balance of $1.2 million by age 59.5. The rich who are smart with their money will find ways to rollover an after-tax 401k or Roth 401k into their Roth IRA through what is called the Backdoor Roth. This is a complicated workaround that congress is actively trying to stop.
Now we have a new way to grow our Roth IRA’s using 529 Rollovers.
Clarifications
At this time, the state departments of revenue have not determined wither the rollover from your 529 to your Roth IRA will be subject to state income tax. There are also questions related to the 15-year minimum requirement for open 529’s and the 5-year requirement for associated earnings. The College Savings Plan Network (CSPN), a network of the National Association of State Treasurers, submitted a letter to the U.S. Department of Treasury to seek clarification on these points.
It is believed that the 15-year and 5-year requirements do NOT reset if there are beneficiary changes, account owner changes, and rollovers between 529 accounts. If true, this is a huge win for millions of Americans.
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