Thanks to the Secure Act 2.0, families will be able to move any leftover funds in a 529 investment account to a Roth IRA for the first time.
The legislation was part of the larger spending bill Congress passed at the end of the 2022. It makes a slew of changes to retirement plans, including allowing 529 rollovers starting in 2024.
Families can use 529 plans, which are investment accounts that offer tax advantages, to save for their children or dependent’s higher education costs. Any earnings generated can be taken out tax-free if they’re used for qualified educational expenses.
While these accounts can be a smart way to plan ahead to cover a child’s educational expenses, some families end up unused funds. Before, that money could be transferred to another child or grandchild, used to pay off up to $10,000 in student loans, saved in case the original beneficiary went back to school in the future, or, if there’s no other option, taken out for non-educational expenses with a 10% penalty.
Now families have another tax- and penalty-free option for leftover funds.
“If your child gets a scholarship, goes to a less expensive school, or doesn’t go to school, the money can get repositioned into a retirement account,” says Austin Chau, a certified financial planner (CFP) in San Francisco.
But as with any tax law change, the devil is in the details.
How you can rollover a 529 plan to a Roth IRA
Here’s what we know about the change so far. Under the Secure Act 2.0, there is a lifetime rollover limit of $35,000, as well as an annual rollover limit, which is equal to the yearly IRA contribution limit ($6,500 this year). The individual who moves the funds must be the designated beneficiary of the 529 plan (not the custodian of the account), and the Roth IRA must also be in their name.
To initiate the rollover, the 529 account must have been open for at least 15 years, though contributions and earnings from the past five years are not eligible for rollover.
The amount of money rolled over won’t be taxed and families won’t incur a penalty, assuming the beneficiary follows the standard Roth IRA distribution rules. And the income eligibility limits that apply to regular Roth IRA contributions do not apply to these rollovers.
“Families need to know to wait for more guidance from the IRS,” says Kristin McKenna, CFP and president of Darrow Wealth Management in Boston. “The [Secure Act] 2.0 only gave broad strokes, additional detail is needed for clarity on possible planning opportunities.”
While there are a lot of details still to come, the change makes a 529 account an even more attractive estate planning tool, says Matt Stephens, CFP in Wilmington, N.C.
“Now if a family has extra money that they want to give to a child, a 529 plan is the absolute best place to invest that money,” he says.
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