Can You Roll a 529 into a Roth IRA? All You Need to Know about the New 529 Rule

Saving for K–12 education and college are important financial steps for many North Carolina families. With an NC 529 Account, the money you save can be used for many educational purposes.

However, some families worry about overfunding their NC 529 Account and may wonder what they can do with any excess funds without losing the tax benefits. You have several options for the money, including a new rule that has many account holders asking, “Can you roll a 529 into a Roth IRA?” The answer is yes! With the new regulations effective January 1, 2024, this possibility has become a reality, offering another tax-free and flexible solution to a common concern among NC 529 savers.

Before we discuss the new rollover rule, let’s take a closer look at the differences between the NC 529 Plan and a Roth IRA.

NC 529 vs. Roth IRA

The NC 529 Plan is a tax-advantaged savings and investment plan designed specifically for education expenses. Withdrawals can be made tax-free for a range of qualified educational purposes, from K–12 tuition and college expenses to student loan payments, career/technical programs, and more. Before making a withdrawal from an NC 529 Account, it’s a good idea to confirm that your intended use of the funds is one or more qualified education expenses to make sure you’re maximizing your tax benefits. Find additional NC 529 resources on our website for answers to common questions.

A Roth IRA (Individual Retirement Account) offers a different kind of tax advantage focused on retirement. Contributions to a Roth IRA are made with after-tax dollars. The earnings and withdrawals are generally tax-free, making this type of account especially beneficial for long-term retirement savings.

Now that you know a bit more about the differences between NC 529 vs. Roth IRA, let’s take a closer look at how they can work together to save your family money on taxes.

How the 529 to Roth IRA Rollover Works

Can you roll a 529 into a Roth IRA? You sure can! The new regulation allows the account owner to roll over unused NC 529 funds to a Roth IRA without incurring taxes or penalties. The ability to roll over an NC 529 Account to a Roth IRA is subject to a few conditions:

• The NC 529 Account must have been open for at least 15 years.
• The rollover must be made into the NC 529 Account beneficiary’s Roth IRA.
• The rollover amount is subject to annual Roth IRA contribution limits. In 2024, the annual limit is $7,000 ($8,000 for people over 50). 
• The total lifetime limit for such rollovers is $35,000 per beneficiary.
• Contributions and earnings from the last five years are ineligible for rollover.

To initiate a rollover from your NC 529 Account to Roth IRA, contact us. It’s important to seek advice from a financial planner or advisor to ensure you’re utilizing the rollover correctly.

Additional Options for Unused NC 529 Funds to Avoid Extra Taxes

The new Roth IRA rollover rule can ease any worries of overfunding an NC 529 Account. This shift significantly enhances the flexibility and appeal of 529 plans for families. Don’t forget that excess funds can be used in many different ways after the beneficiary has used what they need from the account for their education. First, you can always make a non-qualified withdrawal, but you will then pay federal and state taxes, as well as a 10% penalty.

Here are a few ways to use the funds and still take advantage of the tax benefits: 

• Do nothing – NC 529 Accounts don’t expire. You can keep the funds in the account for the beneficiary to use for further education, such as grad school or other eligible career programs.
• Change the beneficiary – Another family member, such as a sibling, cousin, or parent can use the funds for their education.
• Scholarship withdrawal option – Make a penalty-free withdrawal in the same amount as any scholarship or grant earned by the beneficiary.
• Roll over excess funds into a Roth IRA – This is the new rule beginning in 2024 (certain criteria apply.)

Invest in the Future With NC 529

Now that we’ve answered the question, “Can you roll a 529 into a Roth IRA?” we hope that you’re as excited as we are about this significant enhancement for the NC 529 Plan. The new rule shifts the landscape of education saving while providing greater financial security and flexibility across different life stages.

Your diligent savings can have an impact beyond education and potentially for future generations. If you’re ready to start saving and investing for K–12, college, and beyond, open an NC 529 Account today.