The SECURE 2.0 Act, enacted to enhance retirement savings opportunities, includes a provision allowing for the rollover of 529 plan funds to Roth IRAs. This change addresses a common issue faced by some families: what to do with leftover 529 plan funds after educational expenses have been covered. The new provision offers a tax-advantaged solution to this problem.
Key Features of Rolling a 529 Plan to a Roth IRA:
- A $35,000 rollover lifetime limit.
- The rollover must be made to the Roth IRA of the 529 plan’s beneficiary, ensuring the funds continue to benefit the same individual.
- The 529 plan must have been in place for at least 15 years with the same beneficiary.
- Contributions made to the 529 plan (and their earnings) within the last five years are not eligible for rollover.
- The rollover amounts count towards the annual Roth IRA contribution limit. For 2024, the limit is $7,000 for individuals under age 50.
The rollover from a 529 plan to a Roth IRA is tax-free, similar to other qualified distributions from 529 plans. Furthermore, Roth IRAs offer significant tax advantages, including tax-free growth of investments and tax-free withdrawals in retirement, provided certain conditions are met.
Who Could Benefit from Rolling a 529 Plan to a Roth IRA?
This strategy is particularly beneficial for individuals with surplus 529 funds. It is important to check that the account has been open for at least 15 years and identify any recent contributions. Next, coordinate with your financial advisor to ensure all eligibility criteria are met and to navigate the rollover process. This will typically involve contacting the 529 plan administrator to initiate the rollover and ensuring the funds are correctly transferred to the Roth IRA custodian.
Case Study of 529 Rollover
Consider the case of “Jack” (not his real name), who set up a 529 plan for his daughter, “Jane” (not her real name), over 15 years ago. Jane recently finished her studies and the 529 account, which she is the beneficiary of, is well over the $35,000 lifetime limit.
Together with Jack, we determined a viable strategy to jumpstart Jane’s retirement savings was to take advantage of this new provision. We will begin rolling over the annual Roth contribution limit from the 529 plan to her newly opened Roth IRA. We will continue implementing this strategy annually until we have reached the lifetime rollover limit.
The ability to roll over 529 plan funds to a Roth IRA opens up new possibilities for maximizing the value of your savings. By understanding and leveraging this provision, you can turn unused educational funds into a powerful tool for retirement planning.
If you’re interested in learning more about this opportunity and how it fits into your financial strategy, contact us today. Our team of expert financial planners is here to help you navigate this and other changes brought about by the SECURE 2.0 Act.
