‍If you’re using a 529 plan to save for your child’s higher education, a recent legislative update could be a game-changer. The SECURE 2.0 Act, approved in late 2022, introduces a new perk for 529 plan holders. Starting in 2024, you may be eligible to transfer your unused 529 funds into a Roth IRA retirement plan free from taxes and penalties.

Before unraveling the changes brought by the SECURE 2.0 Act, it’s important to briefly recap what a 529 plan is. A 529 plan is a savings plan with tax advantages designed to aid families in saving for future college expenses. Over the years, these plans have grown in popularity due to their tax advantages and flexibility.

However, many families have been concerned about what happens to the funds if they remain unused for educational expenses. The SECURE 2.0 Act has brought a solution to address this concern.

The Impact Of The SECURE 2.0 Act

The SECURE 2.0 Act, passed by Congress on December 23, 2022, and signed into law by President Joe Biden a few days later, made a significant amendment to the Internal Revenue Code. This amendment allows for tax and penalty-free rollovers from 529 plans to Roth IRA retirement plan accounts starting in 2024.

This new provision brings a sigh of relief to families who are apprehensive about not utilizing the money they’ve saved in their 529 plans.

Before the SECURE 2.0 Act, you’d have to make a non-qualified withdrawal if you wished to withdraw funds from your 529 plan for non-educational expenses. Such a withdrawal is subject to income tax and a 10% federal tax penalty on earnings.

But with the new regulations, you can roll over 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free starting this tax year.

How Much Can Be Rolled Over?

The amount you can roll over from a 529 plan into a Roth IRA account is subject to the annual Roth IRA contribution limits set by the IRS. For 2024, the annual Roth IRA contribution limit is $7,000, with an additional $1,000 allowed for individuals over 50 with the catch-up limit allowance.

Moreover, there’s a lifetime limit of $35,000 per beneficiary for 529 plan rollover contributions to Roth IRAs.

Special Rules For 529 Plan Roth IRA Rollovers

While the rollover rules are relatively straightforward, there are a few special conditions to consider:

  • While Roth IRA contributions are usually subject to income limits, these limits are waived when rolling over from a 529 plan. This means even higher-income people can contribute to a Roth IRA through a rollover.
  • The 529 plan must have existed for at least 15 years before any rollovers can take place. According to Saving For College, changing designated beneficiaries will likely restart this 15-year clock.
  • You cannot roll over any contributions or earnings on contributions made in the last five years.

Should You Convert Your 529 Funds To A Roth IRA Now?

Transferring leftover 529 funds to a beneficiary’s Roth IRA can be an excellent way to kickstart their retirement savings. However, you may not need to rush into this.

Some states that offer tax benefits for 529 contributions may not recognize these rollovers as a qualified expense; this could lead to state tax penalties. Some states must update their laws to include these rollovers as a qualified expense, while others may choose not to.

It’s wise to monitor the evolving regulations and consult a tax professional for personalized advice.

Other Options For Leftover 529 Funds

While the new rollover option is exciting, it’s not the only avenue available for your leftover 529 funds. Here are a few other options to consider:

  • Keep the money in the account. There is currently no time limit on when funds must be withdrawn. This allows your money to continue growing tax-deferred until it’s needed.
  • Use the funds to make up to $10,000 in payments for qualified student loans for the beneficiary or their sibling.
  • Transfer the savings to another eligible family member. You could even use it for your own higher education!
  • Withdraw the money and use it however you like. However, this would incur taxes on any earnings, plus a 10% penalty on those earnings.
  • If funds are leftover because the beneficiary received a scholarship, you can withdraw up to the amount of the scholarship. This withdrawal will be subject to taxation, but it avoids the 10% penalty.

The SECURE 2.0 Act has brought an important change to 529 plans, giving families another reason to save for college without added concerns around unused funds. While there are limits and potential tax implications to consider, it’s a significant step in the right direction, providing families with more financial flexibility and confidence.

It’s typically best to consult with a financial advisor or tax professional to understand the best course of action for your specific situation. With that said, here’s to more financial freedom and this exciting new perk for your 529 plan.

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