Five things to know about rolling a 529 account into a Roth IRA
An exciting new change is on the horizon for 529 plans that will allow account owners to roll over remaining funds to their child or grandchild’s Roth IRA federal tax free.
The new legislation, part of the SECURE Act 2.0, takes effect on January 1, 2024. Here are some answers to key questions about the new rules.
- Who can receive the assets? Rollovers can be made to the Roth IRA of the beneficiary of the 529 account.
- How long do you have to own the 529 account? The 529 account must have been open and in the beneficiary’s name for more than 15 years and the eligible rollover amount must have been in the 529 account for at least 5 years (including contributions and earnings). If you started contributing to the account when your beneficiary was young and there are assets left over after he or she has completed school and started working, this could be a great way to keep contributing to your loved one’s life.
- How much can be rolled over? Rollovers are capped at the annual maximum for Roth IRAs, which for 2023 is $6,500, with an aggregate lifetime limit of $35,000. This is also dependent on the beneficiary’s income earned and IRA contributions made. For example, if your beneficiary has already contributed $3,000 to a Roth IRA, the maximum you could roll over that year is $3,500.
- Does the beneficiary need a job or have already contributed to the Roth IRA? The beneficiary must have earned income that at least equals the amount to be rolled over. For example, if you’re planning on rolling over $5,000 in 2024, your beneficiary must have earned at least $5,000 for the year.
- What if the beneficiary makes too much to contribute to a Roth? There is no earned income limit for these transfers. Normally, you can’t contribute to a Roth IRA if your modified adjusted gross income in 2023 is more than $153,000 for single filers or $228,000 for those married filing jointly.
There are still a few things that need to be ironed out. We’re awaiting further guidance on what is allowable if you’ve changed or want to change the beneficiary of the 529 account. Also unclear is whether any earnings transferred to a Roth must remain in the account for at least 5 years, as per IRS rules.
529s are growing more adaptable
The 529 plan keeps getting more attractive as both an education saving and estate planning tool. Being able to roll over your 529 into a beneficiary’s Roth IRA is just the latest in a string of enhancements made over the past few years. 529s have been broadened to include paying for a child’s precollegiate private school education (up to $10,000 annually) and repaying student loans of up to $10,000 without needing to pay taxes on the withdrawals.1
Add this to tax-free distributions for qualified education expenses, generous contribution maximums, parental control of the account, and investment flexibility and the 529 plan may be a great option for helping to finance your child or grandchild’s future.2 Be sure to meet with a financial professional who can help you navigate the most appropriate course.
Important disclosures
1 Please check to determine if your state offers a similar state tax benefit for K through 12 education. Consult your financial, tax, or other professional to learn more about how state-based benefits (including any limitations) would apply to your specific circumstances. Some states do not consider 529 withdrawals for primary and secondary school education, student loan repayments, and apprenticeship costs to be qualified withdrawals and, therefore, the investor may be subject to penalties. The $10,000 qualified education loan limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. 2 State laws and treatment may vary. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty. Please consult your tax professional for more information.
This material does not constitute financial, tax, legal, or accounting advice, is for informational purposes only, and is not meant as investment advice. Please consult your tax or financial professional before making any decision.
John Hancock Investment Management Distributors LLC is the principal underwriter and wholesale distribution broker-dealer for the John Hancock mutual funds, member FINRA, SIPC.
John Hancock Retirement Plan Services, LLC offers administrative or recordkeeping services to sponsors and administrators of retirement plans. John Hancock Trust Company LLC provides trust and custodial services to such plans. Group annuity contracts and recordkeeping agreements are issued by John Hancock Life Insurance Company (U.S.A.), Boston, MA (not licensed in New York), and John Hancock Life Insurance Company of New York, Valhalla, New York. Product features and availability may differ by state. Securities are offered through John Hancock Distributors LLC, member FINRA, SIPC.
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