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

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

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