Recently, 529 accounts became a more diverse planning tool with the SECURE Act 2.0 legislation that went into effect on January 1.
Here’s what you need to know:
Typically, 529 plans are funded to pay for “qualified education expenses”, like college tuition.
The contributions are not tax deductible but grow tax deferred, and if taken out for qualified expenses, are tax-free. However, taking money out for other “non-qualified” purposes will generally trigger penalties and taxes.
Meaning that if your kid didn’t go to a qualified K-12 or college or didn’t use up the funds because they received a scholarship, you didn’t have a lot of choices for the money in the account that didn’t come with penalties.
One option for that left over money was to change the beneficiary so the money went to pay for another child’s education, but that was about it.
Here’s some good news:
Starting in 2024, 529 funds that don’t get used for education will be allowed to be rolled over to the beneficiary’s Roth IRA, free of taxes and penalties.
But — and there’s usually a but — there are some caveats and limitations we need to keep in mind:
- Rollovers will count as contributions and can’t exceed the annual IRA contribution limit ($6,500 in 2023).
- Rollovers can only be made to the beneficiary’s Roth IRA (i.e. the child’s or grandchild’s) and not the account owner’s.
- The 529 account must have been open for at least 15 years (and possibly be in the same beneficiary’s name for that period).
- You can’t roll over contributions (or their earnings) made in the last five years.
- There’s a $35,000 lifetime cap on rollovers.
Are 529 rollovers a big deal?
We think so. It opens the door to doing much more with your child’s education savings than simply paying for college.
Imagine the boost you could give your child’s retirement over their lifetime.
Imagine your child graduates college – or doesn’t attend college – with funds still in their 529 account. So you roll the remainder to a Roth IRA in their name. Because you know that investing early in life is the best way to put time on their side. The money grows for the next 45 years, tax-free.
They could kick off their retirement with a sizable tax-free nest egg. All courtesy of you and your forethought.
Imagine the gift you could be giving your children (and grandchildren) by giving them such a head start.
What can you do with this information now?
If you have children and haven’t opened a 529 account, go ahead and establish one now, even if it’s for just a few bucks to get that 15-year clock started!
If you have questions about 529 plans, or any other planning or investment idea, please reach out!
Iacurci, Greg, “Families can make a tax-free rollover from 529 plans to Roth individual retirement accounts starting in 2024”, CNBC, Updated December 23, 2022, https://www.cnbc.com/2022/12/23/tax-free-rollovers-from-529-plans-to-roth-iras-may-be-allowed-in-2024.html
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state’s 529 Plan.
