Happy New Year!
Many parents use 529 college savings plans to save for their children’s higher education. If they have a financial advisor, there should be a conversation about what happens if their child doesn’t go to college, gets a scholarship or doesn’t need as much as the account accumulates by the time it is needed. The conversation used to be “well you can use it for your other children or grandchildren or there will be taxes and a penalty”.
Starting in 2024, 529 account owners will have the option to use excess 529 plan funds to jumpstart the retirement of their beneficiaries. In December 2022, SECURE Act 2.0 was signed into law to enhance retirement savings opportunities for Americans. One provision will allow owners of a 529 plan to move unused funds in the account directly to the plan beneficiary’s Roth IRA. Up until the law is in effect, if beneficiaries use assets in a 529 plan for anything other than qualified educational expenses, the earnings portion of any nonqualified distribution is likely subject to ordinary income taxes and a 10% penalty.
To be able to roll the excess 529 funds to a Roth IRA the following conditions must be met.
- 529 accounts must have been maintained for a minimum of 15 years to be eligible for transfer.
- The funds from the 529 plan must be moved directly to a Roth IRA of the 529 plan beneficiary.
- The 529 transfer is subject to a lifetime maximum of $35,000 from a 529 plan account to a Roth IRA.
- Roth IRA contribution limits still apply, and for 2024, those limits are $7000 per year if the beneficiary is under 50 and $8000 per year for those over 50.
o These limits are subject to change every year. - The Roth IRA income thresholds will not apply to these contributions; however, the beneficiary will need to have earned income equal to or more than the contribution to move 529 funds into the Roth.
There is another potential option. If you created a 529 account for a child or other beneficiary and have excess funds in the account, you could technically change the beneficiary to yourself, but based on the language in SECURE Act 2.0, this may likely reset the 15-year clock. This means you would need to wait 15 years before you could transfer any 529 plan funds into your Roth IRA.
Government agencies still need to confirm whether the clock will be restarted or not, so there may be unforeseen consequences of initiating a beneficiary change.
If you would like to discuss this or any other financial topic, I invite you to contact me.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.