There’s a big, exciting change for 529 plans! With passage of the SECURE Act 2.0, these popular education funding plans may become even more popular. In the past, many parents were concerned about their child possibly not attending school and not using the funds. Another concern for many was overfunding and how to withdraw the money. Those two fears may be somewhat relieved with the new legislation opening up financial planning opportunities.
Starting in 2024, if you have a 529 plan that is at least 15 years old, you will have the ability to rollover up to $35,000 from the 529 plan, to a Roth IRA. The $35,000 is an aggregate lifetime limit. It’s also important to note your rollover is subject to annual Roth IRA limits (minus any contributions made to a traditional IRA or Roth IRA for the same year). That is, you cannot roll the full $35,000 in one year. Let’s look at a simplified example. Jane’s daughter, Anna, is a 529 beneficiary and has finished school and started working. Anna has been earning money from her job and she put $1,000 into a traditional IRA because she was excited to be saving for her future. If the annual limit on contributions is $6,500 Anna could rollover $5,500 of her 529 money to a Roth IRA. Given that she is under 50, this would fulfill her maximum IRA contributions for the year. Anna could then rollover the year’s contribution maximum each year until she has used up the $35,000 limit.
There are a few other caveats to keep in mind. The Roth IRA recipient/owner must be the 529 plan beneficiary. Contributions (and earnings) to the 529 plan made within the last five years are not eligible for this special rollover treatment. The Roth IRA recipient must have income equal to the amount rolled over. On a positive note, income limits do not apply. It’s also worth noting that there is some scuttlebutt around whether you can simply name yourself as beneficiary and roll the funds into a Roth IRA for yourself. I am sure Congress will clarify this soon.
This is a huge opportunity for those planning for retirement and saving for their children's education. Anyone considering this should open a 529 as soon as possible to start that clock ticking. For parents and grandparents, this can be a tool for newborns. Deposit the minimum to get started as soon as the baby is born and build your balance from there. If your 529 plan grows and the account has leftover, unused funds for education, you now have a new retirement option worth up to $35,000. That’s quite a nice head start for your child. This is a win for parents and students who have accounts that have grown significantly.
Roth IRA as an option is far superior to the alternative of taking the funds leftover in a 529 as a non-qualified withdraw. In that situation, you would owe ordinary income tax and a 10% penalty on the growth you withdraw.
This is new legislation and effective in 2024. Between now and the first rollout year, Congress may yet again tweak the regulations. Check with your financial planner to confirm the latest information. As an independent Certified Financial Planner™, I can help you with these and other decisions. Contact me and let’s get started! #talktometuesday #education #Hireaplanner #stressfree #IRS #401k #403b #Roth #IRA #RothIRA #529 #529Plan #Tax #TaxFiling