529 unused funds and taxes for non qualified WD
I have 1 child who is no longer going to use the funds for college. I have transferred some of the account over to her ROTH and was going to take the rest and put in my individual account with Fidelity but would be paying taxes on $7,000 (and the 10% penalty). Wondering if there any work arounds or suggestions for this? Thanks.
Join the conversation
Sign up to reply, follow discussions, and connect with the ChooseFI community.
Comments
How much of the 529 was rolled over to the beneficiary's Roth IRA? Under Secure Act 2.0 you can rollover up to $35K from a 529 to the beneficiary's Roth IRA. You would need to spread out the $35K rollover over several years since the annual IRA contribution limit applies. These rollovers would count as the beneficiary's annual IRA contribution. So you could leave that $7K in the 529 and use it for a future year's rollover into the beneficiary's Roth IRA if you haven't already reached the $35K limit.
Up until April 15 you can still make an IRA contribution for 2025 so you could rollover both 2025's and 2026's contribution.
I have over 15,000 in the account and 7,000 of that is considered gains that I would pay taxes on if it's not qualified. I def could move more of it over to her ROTH. I think I moved 3,000 over to her already.
Consider leaving the excess money in the 529 and each year make a Roth IRA contribution using rolled over 529 money until the 529 is depleted.
Be sure you're adhering to the eligibility requirements for making the rollovers.
- The 529 must have been open at least 15 years.
- You cannot rollover 529 contributions made within the past 5 years.
- The beneficiary must have earned income to match the Roth IRA contribution (rollover).
Unless you really need the money, I would just start transferring it all to her Roth IRA or leave it in there (make sure it's properly invested) and someday it would pay for her future children's college. IMO not worth paying the taxes.
Does your child have a disability? ADHD? Maybe ABLE account?
I do believe she was diagnosed with ADHD. How would this matter? I don't know what an ABLE account is but can look that up.
According to Gemini
Moving funds from a 529 college savings plan to an ABLE account is generally penalty-free and tax-free, provided you follow specific IRS rules regarding limits and beneficiaries.
While this provision was originally set to expire at the end of 2025, recent legislation (specifically the One Big Beautiful Bill Act of 2025) has made these rollovers permanent.
Key Rules for a Penalty-Free Rollover
To avoid the 10% federal tax penalty and ordinary income tax on earnings, the following conditions must be met:
• Beneficiary Match: The ABLE account must be for the same beneficiary as the 529 plan, or for a "member of the family" of the 529 beneficiary (as defined by Section 529 rules, which includes siblings, parents, and cousins).
• Annual Contribution Limit: You cannot roll over an unlimited amount. The total of all contributions to an ABLE account in a single year—including the rollover—cannot exceed the annual ABLE contribution limit.
• For 2026, the standard annual contribution limit is $20,000.
• Any amount rolled over in excess of this limit would be considered a non-qualified withdrawal from the 529 and could be subject to taxes and penalties.
• ABLE Eligibility: The recipient must still meet the standard eligibility requirements for an ABLE account (disability onset before age 26, though this age limit increases to 46 starting in 2026)