Ask Liz Weston

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Roth IRA

Q&A: What can be done with unused 529 funds?

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Dear Liz: My parents set up 529 college savings accounts for my niece and nephew. The accounts are now quite substantial. My nephew chose to go to community college for his freshman year, and seems to be leaning toward not continuing in college. If he chooses to go to a trade school instead of college, can the 529 funds be used for that? Or, if he decides not to pursue either college or trade school, what becomes of those funds in his 529 account? Can they be transferred to his sister (who may not need it due to the large amount in her own account)? Is there any ability for my parents to recoup the money? What are the available options?

Answer: College savings accounts can be used at any eligible post-secondary institution, including most trade and vocational schools. In addition, up to $35,000 of unused 529 funds can be rolled tax- and penalty-free into a Roth IRA for your nephew, subject to various rules. If your nephew had student loans, up to $10,000 could be used to pay those, as well.

Your parents have many other options for unused funds. They can change the beneficiary to your niece, or any other eligible family member (which can include the original beneficiary’s spouse, children, siblings, nieces, nephews, cousins, in-laws, or parents). In addition to college expenses, 529 withdrawals can pay for up to $10,000 in annual expenses for tuition at elementary and secondary schools.

Account owners can even change the beneficiary to themselves, although they would need to incur expenses at an eligible institution to get tax-free withdrawals.

Finally, your parents could simply withdraw the money and owe income tax on the earnings plus a 10% federal penalty.

That should probably be a last resort, though. Since there’s no deadline to use the money, it can be left alone to grow for the future. Your nephew may want more education later, or your niece’s education could be more expensive than expected. Even if they don’t use the money, either or both of them may someday have kids who could use the money for their schooling.

Q&A: Should I convert my IRA to a Roth?

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Dear Liz: I have $160,000 in a 403(b) retirement plan and I’m 70. I know I have to start taking required minimum distributions (RMDs) at age 73. Should I transfer the funds to a Roth IRA or can I start taking the RMD from the 403(b) and leave the remainder to grow?

Answer: You can take your RMDs from the 403(b). Transferring the money to a Roth IRA would be known as a conversion, and that could make the entire amount taxable.

Late-in-life conversions can make sense if future RMDs will push you into a higher tax bracket than you are now, or if you’re willing to pay the tax bill to provide future tax-free income to your heirs. (Roths don’t have RMDs, so the account can be passed intact to your beneficiaries, who will usually have 10 years to drain the account.) Conversions can have other consequences, such as raising Medicare premiums, so a tax pro’s advice should be sought before proceeding.

Q&A: How to fix a mistaken contribution to an IRA

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Dear Liz: When I retired, I had a small 401(k) with about $12,000 in it. Instead of rolling that money into an IRA, I took a distribution and paid taxes on it. I had no immediate need for the remaining funds, so eventually I opened a new IRA account and deposited the money.

I now realize I should have put it in a Roth IRA so I wouldn’t face double taxation on the money. This is the stupidest thing I’ve done in recent memory. Is there any legal mechanism I can use to get that money out and into a Roth without paying taxes the second time?

Answer: You made a mistake, but probably not the one you think.

You can’t contribute to an IRA — or a Roth IRA, for that matter — if you don’t have earned income. So if you’ve fully retired, you should contact your IRA administrator and let them know you need to withdraw your “excess contribution” as well as any earnings the contribution has made.

If you contributed this year, you have until your tax filing deadline — typically April 15, 2026 — to remove the funds without penalty. If you contributed in a previous year, you’ll typically face a 6% excise tax for each year the money remained in your account.

Now, a warning about financial mistakes: They tend to become more common as we age. That can be incredibly unsettling, especially to do-it-yourselfers used to handling finances competently on their own. Retirement is a good time to start implementing some guardrails to protect ourselves and our money.

Hiring a tax pro would be a good first step. Anything to do with a retirement fund should be run past this pro first to make sure you’re following the tax rules.

Q&A: When it comes to Roth IRAs, 59½ and 5 are the magic numbers

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Dear Liz: You recently answered a question about Roth conversions, saying that each conversion triggered its own five-year holding period. It was my understanding that after age 59½, the five-year rule doesn’t apply and earnings aren’t taxed.

Answer: The rules for Roth IRAs can be complicated, and they’re different for accounts that you fund directly versus those that are funded through conversions.

If you contribute directly to a Roth, you can withdraw your contributions any time without tax or penalty. You can withdraw earnings tax free if you’re 59½ or older and the account has been open for at least five years.

But as mentioned in the previous column, the five-year holding period applies to each conversion you make from another retirement account into a Roth. What goes away after age 59½ is the 10% penalty for early withdrawal, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Earnings withdrawn before five years can be taxed as income. However, it’s assumed that any withdrawals are principal first, so you’d have to withdraw the entire conversion amount before earnings would be taxed.

Luscombe notes that some people set up separate accounts for each conversion to make tracking the five-year periods easier. That could be especially helpful if they plan to make substantial withdrawals that could include earnings before the last conversion amount hits its five-year mark. Once all the five-year periods have expired, the accounts can be combined into one.

Q&A: Roth conversions and holding periods

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Dear Liz: Eight years ago I converted a number of stocks from an IRA to a Roth IRA and paid the taxes. Now I am in a position to convert the last shares but want to do it incrementally over the next four years. Does each conversion then require its own five-year waiting period or will anything in the existing Roth now qualify to be withdrawn at any time?

Answer: The IRS requires five-year holding periods before earnings can be withdrawn tax-free from Roth accounts. The five-year rule applies separately to each Roth conversion, so the partial conversions you’re contemplating will each have their own five-year holding period, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

That’s different from regular Roth accounts, where the five-year rule starts the year the account was first opened and isn’t triggered again by subsequent contributions, Luscombe says.

This week’s money news

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This week’s top story: Smart Money podcast on the price of parenthood. In other news: 4 tips on avoiding financial regrets in retirement, opening a Roth IRA with a summer job, and Supreme Court strikes down student debt cancellation.

Smart Money Podcast: The Price of Parenthood: In Vitro Fertilization and the Future of Parenthood
This week’s episode continues our Nerdy Deep Dive into the price of parenthood.

Experts Offer 4 Tips on Avoiding Financial Regrets in Retirement
Even if you’re already retired, you can take action to improve your retirement finances.

Got a Summer Job? Consider Opening a Roth IRA
You don’t have to wait until your first full-time job out of college to start saving for retirement.

Supreme Court Strikes Down Student Debt Cancellation. Now What?
Get in touch with your servicer and prepare for payments to resume in October.