529 Plans Now Allow Retirement Rollovers —What Are the Limitations?

Changes took effect on Jan. 1, but many Utahns have already transferred their funds.

Graduates of Bowie State University put messages on their mortarboard hats during the school’s graduation ceremony at the Comcast Center on the campus of the University of Maryland May 17, 2013 in College Park, Maryland. (Chip Somodevilla/Getty Images)

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Changes that started with federal legislation passed in 2022 are now in effect for those with 529 education savings accounts. Now, besides putting aside funds for school expenses, account owners can jumpstart their retirement savings.

Starting Jan. 1, account owners are now able to roll over unused funds to Roth IRA accounts. It’s an important change for those who had concerns about oversaving for educational purposes, said Greg Dyer, chief compliance officer at My529, a state agency that manages and provides education on the savings plan.

“Congress’ intent was really to help kickstart the retirement savings for a beneficiary that has gotten through college,” he said, “and doesn’t need them anymore for college expenses.”

During the first 10 days of the change, there were more than 90 rollovers in Utah, Dyer said. The state has the fourth largest 529 plan in the country with over $21 billion in assets under its management, a fact Dyer attributed to the state’s low fees in investments and, overall, a good reputation.

529 plans, which got their name from section 529 of Internal Revenue Code, allow people from all over the country — except for Wyoming — to save for tuition and other school expenses, such as books, fees, room and board and other K-12 and graduate school expenses in their state’s plan.

Though there are different kinds of plans, one of the most popular works similarly to a Roth IRA, allowing people to have tax-advantaged savings plans for education purchases.

“You don’t get a federal tax deduction going in, but the funds can compound and grow tax deferred,” Dyer said. “And if you use them for qualified education expenses, then the taxes are waived.”

But, there are some requirements to be able to transfer the funds: Accounts must be over 15 years old and account owners can’t roll over any funds or earnings that have accrued in the past five years.

“Those funds can grow but you can’t put a contribution in last year and then roll over this year,” he said. “You have a five-year kind of wait period.”

The annual amount that users can roll over is limited to the Roth IRA contribution cap, which is typically around $7,000 for all savings sources.

“Let’s say that you put $5,000 into your regular Roth IRA,” he said, “you can only do $2,000 from your 529 plan.”

Then, there’s also a lifetime limit of $35,000 for these rollover contributions.

Utah News Dispatch is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) public charity. Utah News Dispatch maintains editorial independence. Contact Editor McKenzie Romero for questions: info@utahnewsdispatch.com. Follow Utah News Dispatch on Facebook and Twitter.

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