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Can I roll over a Traditional IRA into a 529 Plan for my grandchildren?


If you have money in one Traditional IRA that you want to put in a grandchild plan 529, you cannot simply transfer it from one account to another. Instead, you’ll have to take a distribution from the IRA and then put the money into the 529 plan. This means you’ll have to pay income tax on the money you withdraw as well as a 10% tax penalty if you do. under 59 and a half years old. Fortunately, there are better ways to accomplish the same goal. This article gives you some tips if you want to take money from your IRA to roll over to a 529 plan for your grandchildren.

Pull out key

  • You cannot transfer money from your traditional IRA to a 529 plan without taxing it.
  • In some cases, you may end up paying a penalty if you move money from your IRA to a 529 plan.
  • Better options include using a specific IRA distribution to pay for education expenses, or funding the 529 with regular income or other assets.
  • Unlike a traditional IRA, a Roth IRA can be a flexible way to save for both retirement and college expenses.

Use your required minimum distribution

You usually have to take required minimum distribution (RMD) from your Traditional IRA each year after age 70½ or 72 (depending on the year you turn 70½).

If you don’t need that money for living expenses, you can reinvest it any way you see fit. This includes putting money into your 529 plan. Remember, though, that you still have to pay income tax on the distribution, but it’s inevitable anyway.

Get an IRA Distribution for Education Expenses

If you’re under 59 and a half, you can get about 10% early withdrawal penalty using your IRA distribution to pay some of your grandchildren qualified higher education expenses. These costs include:

  • tuition
  • Mandatory fee
  • room and board
  • Some other costs

Again, you will still have to pay income tax on the distribution regardless of your age.

Fund the 529 Plan with other money

Because it is difficult (if not impossible) to avoid taxes when withdrawing from a traditional IRA, a better move—if you can afford it—would be to contribute to your grandchild’s 529 plan or out of your money. earned income or by cashing in other non-retirement assets, such as money in a mutual fund that’s outside of your IRA.

If you take distributions from non-retirement accounts, you’ll still owe some taxes, but probably at a lower rate. Mutual fund distributions are taxed as long-term capital increase as long as you’ve owned the shares for at least a year, while traditional IRA distributions are taxed at the same rate as your ordinary income, usually at a higher rate.

How much can you contribute?

No matter where the money comes from, there is some limit to how much you can contribute. Giving your grandchildren more than $16,000 in 2022 and $17,000 in 2023 ($32,000 and $34,000 if both you and your spouse contribute) a year will typically trigger federalism gift tax.

The IRS allows you preload your contributions to the 529 plan by creating gifts worth up to 5 years at a time. That’s $80,000 in 2022 and $85,000 in 2023 for one person or $160,000 and $170,000 for a couple.

The states that administer the 529 plan also establish Level about the total amount that can be contributed to 529 unique accounts. As of 2022, those limits range from $235,000 to $550,000, depending on the state.

Please note, however, that the gift tax limit does not apply if you pay your grandchild’s tuition directly to the educational institution. This is called an educational exclusion and it only applies to tuition, not other expenses.

What about Roth IRAs?

If you have a Roth IRA Contrary to a tradition, the rules are different. Withdrawals from Roth accounts are not taxed as long as you meet a certain amount request. And you can withdraw your contributions to the account (as opposed to the account earnings) at any time without penalty.

Of course, the downside of taking money from a Roth IRA to fund a 529 is that you’ll give up the tax-free growth Roth provides and end up having less money for you when you retire.

That said, a Roth IRA can be a good way to save for your grandchild’s college education, especially if you’re not sure if they’ll need your financial help. If your grandchild needs your help, you can withdraw money from Roth tax-free. Otherwise, you can just keep it there for retirement.

What is the difference between a Traditional IRA and a Roth IRA?

The main difference between a Traditional IRA and a Roth IRA is the tax relief. With a traditional IRA, you can avoid paying income tax on the money you put in, but you’ll have to pay tax on withdrawals. Roth IRAs work in reverse: You don’t get a tax break upfront, but your later withdrawals can be tax-free if you meet the rules.

What is an IRA Rollover?

IRA rollover generally refers to the transfer of funds from one retirement account to another, such as from a 401(k) plan to an IRA, or from one IRA to another, sometimes called a rollover. account. If done properly, the rollover will not incur any taxes.

How can I contribute to my grandchild’s 529 Plan?

Grandparents have two basic options: They can open a 529 plan account as the owner, or they can contribute to a 529 plan where the child’s parents are owners. In both cases, the child is the beneficiary. Under current rules, a grandparent-owned 529 account could reduce a child’s eligibility for financial aid, although that could change over the next few years due to a provision in The FAFSA Simplification Act was passed in December 2020.

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