Great question!
Parents can transfer 529 plan savings from one child to another without tax consequences by doing a plan-to-plan rollover or a beneficiary change.
If you find yourself in situation with unused 529 funds, you do have options. If you or the account's beneficiary decide to use the account funds for nonqualified expenses, you may be subject to income tax and a 10% federal tax penalty on any earnings associated with the distribution. That's where a rollover to a Roth IRA could make sense.
But, there are rules you must meet.
- The 529 plan must have been open for the designated beneficiary for at least 15 years. (The Roth IRA also must be established in the name of the designated beneficiary of the 529 account.)
- The amount transferred from a 529 account to a Roth IRA in the applicable year, together with all other contributions in the year to IRAs for the same beneficiary, must not exceed the Roth IRA annual contribution limit applicable to the beneficiary.
- Additionally, the transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date and the aggregate amounts transferred from 529 accounts to all Roth IRAs must not exceed $35,000 per beneficiary.
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