Navigating the New 529-to-Roth Rollover

The SECURE 2.0 Act unveiled over 90 retirement plan provisions. Notably, it allows rolling over funds from a 529 education plan to a beneficiary’s Roth IRA, starting on January 1, 2024. This change has the potential to reshape educational and retirement savings strategies. Here, we’ll guide you through the key details and implications of the new 529-to-Roth rollover.

What’s a 529 College Savings Plan?

A 529 plan is a tax-advantaged account designed to help families save for future education expenses. Named after Section 529 of the Internal Revenue Code, these plans offer individuals a powerful tool to accumulate funds that can be used for qualified education expenses without incurring federal taxes on earnings. While these plans have been a staple in education savings, the SECURE 2.0 Act introduces a game-changing opportunity for those who have funds left in their 529 accounts for any reason, including the completion of their beneficiary’s education.

529-to-Roth Rollover: A New Horizon

Imagine a surplus of funds left in a 529 plan once a child completes their college education. Prior to 2024, there were only a few ways to use leftover funds: transfer the funds to another 529 plan (with strict rules) or withdraw the money and face a 10% federal penalty tax on the earnings portion of the non-qualified distribution. Additionally, the Secure Act 2.0 addresses concerns about “wasted money” if a beneficiary did not attend college by permitting Roth IRA conversions for 529 plans.

Starting in 2024, you have the opportunity to roll over funds from a 529 plan to a beneficiary’s Roth IRA. This flexibility offers parents and beneficiaries exciting opportunities for financial planning, including saving for retirement or other qualifying life events.

Here’s an overview to the key 529-to-Roth details:

Effective Date: The 529-to-Roth rollover provision takes effect in 2024.

The 15-Year Rule: The 529 plan must be open for at least 15 years to use this rollover.

Lifetime Rollover Limit: The maximum allowable rollover amount per beneficiary over their lifetime is capped at $35,000.

Roth IRA Alignment: The Roth IRA must be registered under the name of the beneficiary of the 529 plan.

Contribution Lookback: Contributions and their allocated earnings made within five years of the rollover must remain in the 529 plan until the five-year period is up.

Yearly Rollover Limit: The rollover limit for each year corresponds to the annual IRA contribution cap, adjusted for other IRA contributions.

Direct Transfer: A plan-to-plan or trustee-to-trustee rollover is required—no checks allowed.

No Income Limitations: Unlike Roth IRA contributions, rollovers from a 529 plan don’t have income limitations.

Earnings Requirement: The beneficiary needs to have earned income, and the rollover amount is constrained by the lower value between earned income and the IRA contribution limit. If the beneficiary lacks earned income, rollover isn’t possible.

Superfunding

For individuals focused on long-term planning, the SECURE 2.0 Act introduces “superfunding.” This strategic move permits contributions five times the annual gift exclusion amount to a 529 plan. In 2023, this exclusion is $17,000, equating to a potential superfunding contribution of $85,000 (5 × $17,000).

Tax Considerations & Limitations

While this provision offers exciting possibilities, it’s crucial to be aware of the associated tax implications. Your financial decisions should always be aligned with your individual circumstances and financial goals. Additionally, there are unanswered questions awaiting IRS guidance, like the treatment of a changed 529 beneficiary.

Next Steps

It’s clear that the SECURE 2.0 Act has opened doors for families to maximize their education savings efforts. For more in-depth information about 529 plans, we recommend referring to IRS Publication 970: Tax Benefits for Education. If you need assistance navigating these changes, our team is here to guide you through every step of the process. Contact us today.