How to Convert a 529 to an IRA

There are many types of IRAs including Roth, Traditional and SIMPLE. Be sure you understand what IRA is best for your circumstances and which one you want to convert your 529 into. The 529 is a state or educational institution sponsored savings plan. Each plan differs in details, rates and fees, so it is important to read, understand and ask your 529 administrator if converting is the best thing to do, and if there are any consequences.

Things You'll Need

• 529 Plan
• 529 administrator information
• IRA

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Instructions

• 1

  Calculate your Qualified Education Expenses. These are expenditures that you have used the 529 for. Generally it consists of tuition, fees, books, supplies and equipment required for enrollment at an accredited university. If you haven’t paid any Qualified Education Expenses, then the entire distribution from the 529 plan is taxable.

• 2

  Analyze if you did pay Qualified Education Expenses, how much of the distribution from the 529 is taxable. The formula to calculate this is: Total Distribution from the 529 Plan multiplied by (1 - [Qualified Education Expenses / Total Distribution from the 529 Plan]). Here is an actual example. Let’s say you have a 529 with $20,000 you want to convert to an IRA. If you have already spent $1,000 on Qualified Education Expenses then the equation would be:

  $20,000 * (1- 1000 / 20,000)
  $20,000 * (1 - .05)
  $20,000 * (.95)
  $19,000

  Meaning that when you convert your 529, you will have to pay taxes on $19,000.

• 3

  Look at your 529 statements for administrator contact information. Emailing (if possible) is recommended since you can review your questions and her answers to be sure you covered everything, and you can use the email as future reference. Contact the administrator and tell him you wish to withdraw your 529 funds. You may be able to have the administrator distribute the funds electronically once you get your IRA information, or you may have to get a paper check of the amount you withdrew.

• 4

  Get an online or a paper Form 1040 or Form 1040NR from the IRS. Report your taxable amount from the 529 in line 21. Pay the state and federal taxes.

• 5

  Contact the bank, insurance company or financial company that you want to set up the IRA with. Tell the IRA administrator that the IRA will be funded with the proceeds from a 529 plan. If the 529 administrator is able to make the deposit electronically, get the required IRA account information and email it to the 529 administrator. Either administrator may be able to do this for you.