Tax Planning

New Planning Opportunity for 529 Plans: Future Rollovers to Roth IRA

college student graduating

Beginning in 2024, recent legislation (known as SECURE Act 2.0) will allow the beneficiary of a 529 plan to transfer up to $35,000 of their unused 529 Plan funds over the course of their lifetime to their own Roth IRA without being subject to taxes or penalties.

A 529 Plan is a tax-advantaged investment account and a useful and flexible tool for parents (or other family members) to save for a child’s education expenses. Contributions made to a 529 Plan use money on which you’ve already paid income taxes, and investments inside the 529 Plan account grow tax deferred. But what happens when the beneficiary does not need all of the funds saved in their 529 Plan account?

Withdrawals which are not used for educational expenses may result in income taxes, and possibly an additional 10% federal penalty tax. If the beneficiary does not need the 529 Plan funds for their education, then the money contributed to the Plan might become trapped inside the 529 Plan account. Prior to SECURE 2.0, the participant only had 2 options for unused funds: change the beneficiary of the 529 Plan account or withdraw the funds for non-qualified purposes subjecting the withdrawals to income tax and possible penalties.

As a result of recent legislation, there will soon be a new option for unused funds in a 529 Plan. Beginning in 2024, unused 529 funds can be rolled over into a Roth IRA retirement plan for the same beneficiary. Many of our clients have funds remaining in their 529 Plans once their children finish college. This new provision will allow the funds to be used effectively.

Here is what you need to know about the new 529-to-Roth rollover provision:

  • This provision takes effect on January 1, 2024.
  • The 529 account must be open for more than 15 years before it is eligible to roll into a Roth IRA.
  • The lifetime limit for the rollover is $35,000 per beneficiary.
  • The Roth IRA must be in the name of the beneficiary of the 529 plan (not in the name of the original participant/owner of the 529 Plan account).
  • 529 contributions made within the prior 5 years cannot be rolled over.
  • Transfers from a 529 plan to a Roth IRA are subject to Roth IRA annual contribution limits ($6,500 in 2023), and the beneficiary must have earned income in order to be eligible for the rollover. This means it will take several years for a beneficiary complete the rollover up to their $35,000 lifetime limit.

This new planning opportunity will allow 529 account holders to continue providing for their beneficiaries’ futures by giving their younger beneficiaries a jump start to their own retirement savings. Additionally, this new law and other changes in recent legislation affecting retirement accounts offers an opportunity for clients to review their estate planning goals and how their 529 Plans and retirement accounts may be coordinated with their overall estate planning objectives for their family. If you have any questions about how the new laws affecting 529 Plans and retirement accounts impact your estate plan, please contact us to schedule a consultation with an attorney with The Diamond Law Firm who can review your estate plan.