Converting 529 Plans Into Roth IRAs

Cravens and Company Advisors |


As families celebrate the academic achievements of their graduates, the transition from college tuition bills to financial planning for the future becomes a focal point. Amid the sea of advice, one powerful idea stands out: the potential of the 529 to Roth IRA rollover.

Expanding the Possibilities

Consider a scenario where your 529 plan beneficiary doesn't require the full extent of the saved funds for educational expenses. What if they receive a scholarship, opt for a less expensive school, or choose a different path altogether? Recent legislative changes offer an exciting solution. Starting in 2024, you have the option to convert up to a lifetime limit of $35,000 per beneficiary from a 529 plan into a Roth IRA owned by the 529 beneficiary, provided that the 529 account has been open for at least 15 years. This rollover is subject to annual Roth IRA contribution limits, less any other IRA contributions made by the beneficiary. The beneficiary must also have earned income in the amount of the available Roth IRA rollover.

The genesis of this financial maneuver lies in the SECURE 2.0 Act, passed by Congress in late 2022. Its objective is to enhance the flexibility and benefits of education savings. The Act acknowledges that not every beneficiary will follow a traditional educational trajectory, offering an alternative means to secure their financial future.

Building Wealth with a 529 Plan

A 529 plan offers lots of flexibility, but with the $35,000 Roth IRA rollover option, a 529 plan becomes even more effective. 529 to Roth IRA rollover presents a strategic financial move that not only enhances the potential for wealth accumulation but also empowers families to adapt to changing circumstances and prioritize financial well-being.

The Power of Roth IRA Rollover

Imagine this scenario: A beneficiary of a 529 plan graduates at the age of 24, slightly surpassing the national average. They decide to take full advantage of their educational investment and roll over the maximum allowable amount of $35,000 over 5 years into a Roth IRA. Assuming there is an average annual growth rate of 6%, compounding annually (which we know it does not) and they leave the investment untouched until retirement at age 67, the Roth IRA would have blossomed into an account valued at just over $380,000.  More importantly, these funds could be withdrawn entirely without taxation! This highlights the incredible potential for financial growth and security through prudent financial planning.

In summary, the 529 to Roth IRA rollover is another great strategy to maximize generational wealth while maintaining significant flexibility.