529 to Roth IRA Rollovers: A New Path to Retirement Savings
529 plans got a retirement upgrade! Roll over funds to a Roth IRA tax-free.
Key Takeaways
- Leftover 529 plan funds can now be rolled over to a Roth IRA tax-free.
- 529 plans are now a versatile tool for both education and retirement savings.
- The rollover option is available to everyone, regardless of income.
As a refresher, a 529 plan is a tax-advantaged savings plan designed to help you cover education costs. You fund the account with after-tax dollars, and it grows tax-deferred. Withdrawals are tax-free as long as they're used for qualified education expenses (think college tuition, K-12 tuition, apprenticeship programs, and even student loan payments).
Some employers offer 529 college savings contributions as a benefit. Paidly makes it easy for employers to set up and manage these programs, helping their employees save for education expenses. Learn more about Paidly's 529 college savings contributions.
The Big Change: Rollover to Roth IRA
The Consolidated Appropriations Act of 2023, signed into law in December 2022, includes a provision that allows you to roll over funds from your 529 plan to a Roth IRA without penalty, that started January 1, 2024. This is huge!
Why This Matters
Previously, one of the biggest drawbacks of 529 plans was the risk of penalties on withdrawals not used for qualified education expenses. This made people hesitant to contribute significant amounts. But now, with the Roth IRA rollover option, 529 plans have transformed into a powerful tool for both education and retirement savings.
Rules for the Roth IRA Rollover
- The 529 account must be at least 15 years old with the same beneficiary throughout.
- The amount transferred must have been in the 529 account for at least 5 years.
- Rollovers are subject to annual Roth IRA contribution limits ($7,000, or $8,000 if you're over 50).
- The total amount you can roll over is capped at $35,000.
- Rollovers can only be made to the Roth IRA account owned by the named 529 account beneficiary
- No income limits apply to this rollover.
This is essentially a new form of backdoor Roth IRA, especially beneficial for high-income earners!
Qualified Expenses
Remember, you can still withdraw money tax-free from your 529 plan for qualified education expenses, including:
- Tuition and fees for K-12, college, graduate, or vocational schools
- Books and supplies
- Student loan payments
- Off-campus housing and meal plans
- Computers, internet, and software used for schoolwork
- Special needs equipment
Contribution Limits
529 plans have high contribution limits, varying by state. Aggregate limits range from $235,000 to over $500,000. Be sure to research your state's specific limits.
Want to give your 529 savings an extra boost? With Paidly's Friends Helping Friends feature, anyone can contribute to your child's education fund. It's a great way for family and friends to give meaningful gifts that will make a real difference.
Team Paidly
Paidly is the go-to platform for rising above student debt. We specialize in innovative solutions, such as employer student loan assistance benefits, streamlined 529 plan contributions, and crowdfunding tools for individuals and their families. Backed by nearly two decades of experience in financial technology, Paidly is committed to simplifying student loan repayment, reducing loan dependency, and empowering students to take control of their finances no matter where they are in their educational journey.
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The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Paidly shall have no liability for the information provided. While care has been taken to produce this document, Paidly does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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