529 to Roth IRA

Full Transcript:

Can I fund my kid’s Roth IRA now, by putting money into their 529 plan?

In my last video, I talked about the different contingency options in case you overfunded your child’s 529 college savings account. Now, let’s talk about one of those: The transfer from a 529 plan to a Roth IRA. These transfers have a lot of requirements. So I’m going to go over them today. But please make sure you review your unique situation with your tax and financial professionals.

Now, in the last video, we talked about how Johnny had an extra $30,000 in his 529 plan. We mentioned how one of the options for this would be to going from a 529 to Roth IRA transfer. Let’s talk about some of the requirements to make this happen without getting hit with taxes and penalties.

First and foremost, this 529 plan has to be open at least 15 years, and the money that is being transferred has to be contributed at least five years ago. So, there’s a lot of long time requirements just to get started. Now, in addition to that, when transferring money into Johnny’s Roth IRA, it counts towards his annual contribution limit. So, this year, the contribution limit to a Roth IRA is $7,000. If Johnny puts $3,500 of his own money into his Roth IRA, that means you can only do an additional $3,500 this year of 529 to Roth conversion.

Now, in addition to that, Johnny still has to have met the earned income requirement. You can only contribute to a Roth IRA if you have at least that much in earned income. So, if Johnny is not working, this doesn’t work for Johnny.

Now, lastly, there is also a lifetime $35,000 cap per individual. So, in this case, the $30,000 balance, assuming it doesn’t grow a lot, you can technically do it over multiple years. But as you can see from all of these requirements, it is quite cumbersome.

So, although this is a good contingency option, it is not my favorite contingency option for overfunding a 529 plan. Furthermore, I generally don’t recommend that my clients do this as a primary way of getting money into their child’s Roth IRA.

Now, I hope you found this video educational and informative, and if so, please continue to like it on social media and share it with your colleagues.