Transfer Roth Funds to a 529?

published 22 March 2007

I have a Roth IRA and would like to transfer or convert the account into a 529 college-savings plan. Can this be done?

A Roth IRA has two components: what you contributed and what the account has earned. You can't transfer earnings from a Roth IRA to a 529 without owing income taxes plus a 10% penalty, and you probably wouldn't want to. "Most people would want to keep as much as they could in their Roth for retirement savings," says Joe Hurley of Savingforcollege.com

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Distributions from 529s, on the other hand, are not counted as income in federal financial-aid calculations, he says. So if you know you'll need to withdraw money from the Roth for college, you may be able to improve your financial-aid picture by switching the money to a 529 before the junior year of high school (generally the first year that is counted for financial aid) and investing it in a 529 then, says Hurley.

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As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.