Can I Rollover My 401(k) to a 529?
A 401(k) is an employer-sponsored plan to let employees save for retirement. Money can be accumulated through a combination of employee contributions and an employer match, with both amounts deferred from income taxes until they are withdrawn. A 529 plan, on the other hand, is a program set up by states to save money for college tuition. Both plans have some restrictions regarding rollovers.
A 401(k) can't be rolled over into a 529 account. In fact, a normal distribution from a 401(k) isn't allowed in most cases until the plan is terminated or the account holder turns 59 1/2 or leaves the employer who has set up the account. Exemptions for 401(k) withdrawals exist in cases of severe financial hardship. Educational expenses qualify for hardship distributions, but that money must be used for tuition and related expenses within 12 months.
Age 59 1/2 Withdrawal
After an account holder is 59 1/2, money from a 401(k) can be withdrawn without penalty and used to fund a 529, as of publication. All 529 contributions must be in cash, so the account holder has to take the money out of the 401(k) and deposit it into the 529 account. All withdrawals from a traditional 401(k) are subject to tax as ordinary income.
If an account holder leaves a 401(k) employer at age 55 and does not take another job, money can be taken out of the 401(k) without the 10 percent penalty. They still will be subject to income taxes, even if transferred into a 529. Earnings on money in a 529 account, however, are not subject to tax so long as they are used for tuition and related higher education expenses. Some states also allow income tax deductions on 529 contributions, which might help offset any tax penalties.
Another option for moving 401(k) money to a 529 is to set up "substantially equal periodic payments" after an account holder leaves the employer. These must be made at least annually, with amounts based on life expectancy of the account holder, and continue for five years or until the account holder is 59 1/2. Payments are taxed as income when made but there is no penalty and the distributions could fund a 529.
Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.