Q. The overfunding in my son's account is not due to receiving scholarship or not getting a higher education. It's because he goes to a state university with lower tuition. So can we still rollover his 529 plan to his Roth IRA penalty and income tax free?
A. Yes. There does not have to be any reason why the account got over funded. If you just mis-estimated expenses or put in extra money in "just in case", you still qualify for tax/penalty free rollovers.
Q. Are there any other criteria that we have to meet for penalty and income tax free rollover from his 529 plan to his Roth IRA?
A. Yes, but you appear to know about those*; the $35K and $7K/yr limit. There's also the 5 year and 15 year rules. See: https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth#:~:text=Under%20certa...'.)
Q. On form 5329, it stated that additional tax doesn't apply when including distributions from an education account in income because you used the qualified education expenses to figure the American opportunity and lifetime learning credits. What does this mean?
A. Just like having potential 529 expenses covered by scholarships exempts you from the 10% penalty, having used expenses to claim an education credit also exempts you from the penalty on a 529 distribution in the same amount if used to claim the American opportunity or lifetime learning credits.
*Here's an excellent summary of the rules (Google AI):
"Yes, it is possible to roll over funds from a 529 plan to a Roth IRA, but there are several conditions that must be met:
- Lifetime limit: The total amount that can be rolled over is $35,000 per beneficiary.
- Annual contribution limit: The amount rolled over must be less than or equal to the annual Roth IRA contribution limit. For 2024, the limit is $7,000, or $8,000 for those 50 and older.
- Time requirements: The 529 plan must have been maintained for at least 15 years, and the funds rolled over must have been in the plan for at least 5 years.
- Beneficiary: The Roth IRA must be opened by the 529 plan beneficiary.
- Earned income: The beneficiary must have earned income equal to or greater than the amount rolled over.
The process for rolling over funds from a 529 plan to a Roth IRA varies by plan, so it's important to contact the relevant provider for more information."
