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Maximizing Your 529 Plan: Converting Left Over Funds to a Roth IRA

You've taken the responsible step of investing in your child's or grandchild's future by contributing to a 529 plan, allowing your money to grow tax-free.

But life is full of surprises, and sometimes circumstances change. Perhaps your child received a scholarship, reducing the need for the full amount in the 529 plan. Or maybe their educational path has shifted, leaving you with excess funds.

Fortunately, recent legislative changes have opened up a new opportunity. You can now convert your 529 college savings plan into a Roth IRA, potentially benefiting your family's financial well-being for generations.

Why is this significant?

Typically, taking a non-qualified distribution from a 529 plan comes with consequences. You would face a 10% penalty and be required to pay both federal and state income taxes on the withdrawn amount.

These penalties and taxes can be a burden when you have leftover funds in the plan. However, the ability to transfer those funds into a Roth IRA provides a new avenue for financial security.

Of course, there are some conditions to keep in mind.

Steps to Convert Your 529 to a Roth IRA

1. Verify Eligibility

Not all 529 plans are eligible for conversion to a Roth IRA. There are specific rules regarding the amount, frequency, and account ownership. Notably, the beneficiary of the 529 plan and the account holder for the Roth IRA must be the same individual.

2. Know the Limits

Planning is crucial, as there is an annual limit on the amount you can convert. Currently, the maximum contribution allowed for a Roth IRA is $7,000 per year.

The Secure Act 2.0 states that the total maximum amount that can be rolled over for qualified plans is $35,000. By contributing $7,000 annually, you would reach this maximum in 5 years.

3. Consider Timing

The 529 plan must have been established for at least 15 years before conversion. Additionally, any contributions made to the 529 plan within the past 5 years are not eligible for rollover.

Benefits for All

For young adults not burdened by student loans, this conversion can provide a head start on their retirement savings, setting them on a path towards financial stability. For parents, it offers flexibility to adapt to your family's changing needs.

Our Commitment to Your Financial Success

At Iota, we are dedicated to helping you become as tax efficient as possible, while optimizing your financial situation. Converting a 529 plan to a Roth IRA is just one of the many strategies we can assist you with. 
Let's have a conversation! Contact us today to schedule a complimentary consultation.

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Suite 350 
Sandy Springs, GA 30328
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