With the litany of changes that the Secure Act 2.0 brought, one stood out that rocked the financial-advisory world, 529 Plan – to Roth IRA Rollovers. The excitement this provision garnered was unparalleled. What was delivered fell far from the pedestal that advisors placed it upon, however it offers a powerful and targeted upshot.
A Quick Overview of 529 Plans and Roth IRAs
A 529 plan is a tax-advantaged investment account specifically for education savings. Funds added to a 529 plan grow tax-free if used for qualified higher education expenses, per IRS guidelines.
A Roth Individual Retirement Account (Roth IRA) is a tax-advantaged investment account specifically for retirement savings. Funds added to a Roth IRA grow tax-free if used for retirement, per IRS guidelines.
Breaking the rules on either account can come with some stiff taxes and penalties. Nonetheless, when used appropriately, both vehicles achieve their respective goals better when compared to saving funds in a bank or investing in a brokerage account.
As the name suggests, a 529 plan-to-Roth IRA Rollover moves funds from the education-focused 529 plan to the retirement-focused Roth IRA, which has never been permitted before, and can free up money that is otherwise trapped in a 529 plan. Naturally, the IRS has rules governing this transaction, the key considerations of which we have outlined below.
1. Rollovers cannot occur before 2024.
2. The beneficiary of the 529 plan and the owner of the Roth IRA must be the same person.
3. The 529 plan must have been open for at least 15 years.
4. The 529 plan contributions being rolled over must have been in the 529 plan for at least 5 years.
5. Rollover amounts are subject to annual Roth IRA contribution limits. In 2023, this limit is the lesser of $6,500 or total earned income ($7,500 if 50 or older).
6. Total lifetime rollovers cannot exceed $35,000.
Assuming the above conditions are met, the ability to move $35,000 from a no longer needed 529 plan to a Roth IRA can provide a material benefit, particularly with long-term compounding investment returns.
Who Benefits the Most?
This provision is tailor-made for recent graduates whose days of tuition bills are in the past, who have leftover 529 plan balances, who are new to the workforce and need to redirect their sights on saving for retirement, but do not yet make enough money for that to be easy.
In comes the 529 plan rollover whereby, starting in 2024, these funds can be redirected to retirement savings at a time when the individual might not be able to do so otherwise. A little extra oomph as they establish themselves in their careers while concurrently cleaning up residual balances in otherwise defunct 529 plans can be a BIG win.
There was quite a bit of hype generated by the prospect of this provision, and the resulting impact feels lackluster. While it may not be a financial panacea, there is quite a lot of utility in a 529 Plan-to-Roth IRA Rollover. It will be a great booster for a new cadre of graduates, and a pleasant surprise for those who graduated a while back, but still have a little left over in their 529 plan. We certainly can’t complain about that!
The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.