For families across the UK navigating the daunting costs of higher education, 529 savings plans have long been a cornerstone of financial planning. Yet a common anxiety persists: what happens if you save too much? New provisions, however, are easing those fears by offering alternative routes for unused funds.
Navigating the Roth IRA Rollover: Key Rules and Limits
Thanks to the US Secure 2.0 Act, a significant new option has emerged. It is now possible to transfer unused money from a 529 education savings plan into a Roth Individual Retirement Account (IRA). This move is designed to alleviate concerns about over-saving for a child's university costs, but it is not a simple loophole for retirement. Strict regulations govern the process.
The Roth IRA receiving the transferred funds must be in the name of the original 529 plan beneficiary. Furthermore, the 529 account itself must have been open for a minimum of 15 years before any conversion can take place. Savers cannot convert any contributions made within the last five years, nor the earnings on those recent contributions.
The amount moved from the 529 plan counts towards the beneficiary's annual IRA contribution limit. Critically, there is a lifetime cap of $35,000 on the total that can be shifted from a 529 to a Roth IRA. The transfer must be made directly from the 529 plan to the Roth IRA; taking a personal distribution and then depositing it later is not permitted.
An important stipulation is that the beneficiary must have earned income from employment in the year of the conversion, as this is a standard requirement for Roth IRA contributions. Notably, the usual Roth IRA income limits do not apply to these specific 529 rollovers, offering a potential advantage for higher earners.
Alternative Pathway: Rolling Over into an ABLE Account
For families supporting an individual with disabilities, another valuable option exists. Surplus 529 funds can be rolled over into an ABLE account, a tax-advantaged savings vehicle designed to help cover qualified expenses for people with disabilities without jeopardising eligibility for government assistance.
Eligibility for an ABLE account is limited to individuals with significant disabilities that began before the age of 46. The ABLE account must have the same designated beneficiary as the 529 plan. Funds can be transferred up to the ABLE annual contribution limit, which is $19,000, without incurring tax penalties.
Qualified expenses for ABLE accounts are broader than for 529s, encompassing education, housing, healthcare, employment training, support services, and legal fees. This rollover provides crucial flexibility if a 529 beneficiary is later diagnosed with a disability or becomes disabled due to an accident or injury.
The Bottom Line for Savers
The ability to convert leftover 529 funds into a Roth IRA or an ABLE account offers welcome reassurance for parents and guardians who are diligently saving for future education costs. It mitigates the risk of facing penalties on money that ultimately isn't needed for qualified educational expenses.
However, financial experts caution against viewing a 529 plan as a primary vehicle for retirement savings. The annual contribution limits and the $35,000 lifetime conversion cap are intentionally designed to prevent this. The core purpose of the 529 remains funding education. For retirement, it is still advisable to fund a Roth IRA separately and directly.
As Margaret Giles, a senior editor at Morningstar, highlighted in the original analysis, individual circumstances change in unpredictable ways. These new rollover rules provide families with essential adaptability, ensuring that dedicated savings can continue to serve their beneficiaries' long-term wellbeing, whether for education, retirement, or disability-related needs.
