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The SECURE 2.0 Act: A New Option For 529 Plans And Roth IRA

From 2024, the SECURE 2.0 Act gives those with unused 529 funds the option to roll them over into a Roth IRA. Read about how this can set up the beneficiary for a financially secure retirement.
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Saving for a child’s future education is a wonderful gesture, often filled with dreams and aspirations.

The 529 college savings plan has been a popular choice for parents and guardians to stow away funds for this purpose.

But sometimes, life happens.

The beneficiary may pursue a different path, or they may attend a less expensive school. Previously, this could mean funds getting trapped within the 529 plan, potentially incurring penalties if not used for qualified education expenses.

But there’s good news on the horizon!

Thanks to the SECURE 2.0 Act, from 2024, those with unused 529 funds will have the option to roll them over into a Roth IRA. Let’s dive into what this means for you.

Understanding the 529 College Savings Plan

Named after Section 529 of the federal tax code, the 529 plan is a tax-advantaged educational savings program. It’s funded with post-tax dollars and grows with compound interest. When it’s time, the beneficiary can access these funds tax-free for eligible education-related expenses.

Roth IRA at a Glance

A Roth IRA is a post-tax retirement account that lets you grow your investments tax-free. Unlike the 529 plan, a Roth IRA isn’t limited to educational expenses. Given specific conditions, you can even dip into it for certain non-retirement-related expenses like buying your first home.

Enter SECURE 2.0 Act

Building on the original SECURE Act of 2019, the SECURE 2.0 Act introduced in 2022 includes a provision allowing rollovers from a 529 plan to a Roth IRA, offering a solution for those with unused 529 funds.

Key Points of the 529 to Roth IRA Rollover

  • Lifetime Limit: Beneficiaries can roll over up to $35,000 from their 529 plans into their Roth IRAs over their lifetime.
  • Beneficiary Consistency: The Roth IRA should belong to the same beneficiary as the 529 plan.
  • 15-year Rule: The 529 account should be open for over 15 years to be eligible for a rollover.
  • Five-year Hold: 529 contributions made within the last five years aren’t eligible for a rollover.
  • Annual Limits: The rollover amount should respect the Roth IRA’s yearly contribution limits.

Introducing this rollover option addresses a crucial concern for families and students worried about unused funds in a 529 account. They no longer need to worry about incurring penalties for non-qualified withdrawals or leaving the money trapped. Instead, they can pivot and begin preparing for retirement.

This new provision encourages more people to contribute generously to 529 plans, knowing there’s flexibility down the road.

The SECURE 2.0 Act offers excellent benefits to 529 account holders. Unused educational funds no longer face the risk of stagnation or penalties. Instead, they can be channeled into setting up the beneficiary for a financially secure retirement.

If you’re considering this rollover, mark your calendar for 2024 and chat with us at Notion CFO and Advisors to ensure a smooth transition.

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