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Tax Blog

From a 529 Plan to a Roth IRA

With the passage of SECURE 2.0 in December 2022, parents may want to explore either starting or continuing investments in 529 plans. In 2024, those 529 plans will be eligible to roll the balance into a Roth IRA without incurring penalties or taxes. Prior to the passage, 529 plans were relatively restricted in what they could do outside of paying for educational benefits.

There are some important restrictions that one must be made aware of before executing this type of rollover.

· The 529 plan must have been open for at least 15 years

· Contributions made in the previous 5 years in the 529 plan can’t be rolled over

· The money must be rolled over into the child’s IRA

· The Child must have taxable income to contribute to the IRA

· Annual contributions to a Roth IRA are currently capped at $6,500

· The Total Rollover Cap into a Roth IRA is $35,000

This new benefit can set up future generations for retirement from the moment they are born. Imagine opening a 529 plan after birth and contributing $35,000 over a span of 11 years, or just under $3,200 per year. At 16, your child starts earning taxable income of at least $6,500 for that year. You are able to roll over $6,500 from the 529 plan into their Roth IRA. You continue to do so until you hit the $35,000 limit until they are almost 22. Assuming an 8% return year over year, they would have $7,020 in their account at the end of the first year. After year two they would have $14601.60. Year three would be $22,789.73. Year four would be $31,632.91. Year five would be $41,183.43. And finally, after all of the 529 plans had been rolled over, the account balance would be $47,178.22. Not a bad start for a retirement plan at the ripe age of 22. For more information about how 529 Plans and Roth IRAs may affect you in your estate planning needs, please reach out to the Professionals at The Center for Financial, Legal, & Tax Planning Inc., at (618) 997-3436.

***The information provided above is for general informational purposes only, it is not to be construed as Financial, Legal, or Tax Planning advice. Please consult a Professional if you have any questions.***


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