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New 529 Planning Opportunity

Entering the New Year comes with changes that can benefit 529 plan beneficiaries that were not previously available.  SECURE 2.0 Act, which was passed by Congress in late 2022, incorporated over 90 provisions, with the 529 plan to Roth IRA rollover being one of them.  This provision creates new planning opportunities for unused 529 funds and education planning in general.  In the past, parents and other family members risked over funding 529 accounts and found themselves with excess funds after the beneficiary attended college.  The new provision allows beneficiaries to rollover unused funds into a Roth IRA for their benefit.  However, there are a handful of conditions that must be met to qualify.

What is a 529 Plan?

Section 529 plans are a great tool for education expense planning as they allow for tax deferred growth and tax-free withdrawals for qualified education expenses.  These plans are sponsored by states and were created to encourage parents and family members to save for higher education over time.  Depending on where you live, taxpayers may be eligible for a state income tax deduction.  Account owners can invest the savings over time into several investment options and withdraw funds later for the beneficiary’s education and certain related expenses.

SECURE ACT 2.0

Section 126 of SECURE Act 2.0 contains the provision for tax and penalty-free rollovers from 529 accounts to Roth IRAs.  The goal is to encourage families to save towards education without the worry of over funding 529 accounts and being forced to take non-qualified withdrawals, which come with a penalty.  This provision took effect for distributions after December 31, 2023.

Checking the Boxes

To qualify for the 529 plan to Roth IRA rollover, the account and beneficiary must meet several criteria:

  • The 529 account must be established for the designated beneficiary for at least 15 years.
  • The designated beneficiary must have earned income greater than or equal to rollover amount.
  • 529 to Roth IRA rollover must coordinate with IRA Contribution limits. Maximum of $7,000 ($8,000 over age 50) can be contributed to IRA/Roth IRA (2024), including 529 to Roth IRA rollover.
  • Rollovers must come from 529 contributions made more than 5 years ago.
  • Lifetime limit of $35,000 per designated beneficiary.

Considerations

For parents and family members wanting to utilize a 529 plan for education planning it does not hurt to open/fund a 529 account.  Earlier is better than later as it kicks off the 15 year “marinating window”.  Younger 529 plan beneficiaries with variable income (e.g. summer jobs), may be better off waiting until year end to initiate a rollover when they have better clarity of earned income during the year.  One great benefit is that there is no income phaseout.  This means high earning beneficiaries that would not be eligible to contribute to a Roth IRA can still rollover 529 funds into a Roth IRA.  Lastly, while rollovers must coordinate with IRA contribution limits, a beneficiary can still contribute to qualified retirement plans with their employer (401(k), 403(b), etc.) and still make rollover contributions.  Since the provision is still very fresh, there will likely be further guidance as it relates to the criteria.

If you are considering a 529 plan or rollover, please feel free to reach out to us regarding your beneficiary’s account.  We would be happy to assist with your planning in further detail.

Jack Faerber, CFP®

Sources:

  1. SECURE 2.0 Act of 2022 https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
  2. SEC https://www.sec.gov/about/reports-publications/investor-publications/introduction-529-plans
  3. Fidelity https://www.fidelity.com/learning-center/personal-finance/529-rollover-to-roth
  4. Charles Schwab https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know

The views expressed herein are those of Jack Faerber on January 23, 2024 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners, LLC (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. Charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results.  There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.