For many parents, saving for children’s college education is a primary goal. While the 529 plan has been a useful tool for many families saving for college, a common concern for parents has been overfunding a 529 plan for a child whose educational expenses are unknown. If the child does not attend college or receives scholarships that offset the cost of attendance, the 529 plan may have excess funds. Since 529 distributions are required to be made for qualified education expenses, distributions for non-education expenses are subject to tax on the earning portion and a 10% penalty. SECURE Act 2.0, passed in late 2022 provides a unique opportunity in attempt to address the dilemma of over-funding a 529 account. Beginning in 2024, individuals who have unused funds in a 529 plan will be able to roll over funds from a 529 plan to a Roth IRA on a tax-free basis.

Several requirements must be met in order to roll funds from a 529 plan to a Roth IRA:

  1. The rollover must be made to a Roth IRA in the name of the beneficiary;
  2. No more than $35,000 can be rolled from 529 to Roth over the lifetime of the beneficiary;
  3. Rollovers will be subject to the annual Roth IRA contribution limit, including any other Traditional or Roth IRA contributions made for the year (the lesser of earned income or $6,500 for individuals under 50 in 2023);
  4. The 529 plan must be more than 15 years old;
  5. Contributions to the 529 made in the last 5 years (and the earnings on those contributions) cannot be rolled over; and
  6. Rollovers from 529 plans to Roth IRAs will not begin until 2024.

Another benefit of the 529 to Roth IRA rollover is the fact that the beneficiary will not be subject to the Modified AGI limitations for contributing to a Roth IRA. In other words, in 2023, married individuals with a Modified AGI over $228,000 are typically prohibited from contributing to a Roth IRA. The SECURE Act 2.0 changes allow a beneficiary to transfer up to $6,500 from their 529 to their Roth IRA even if they make above this amount. As noted above, if the beneficiary makes less than $6,500, he or she may only transfer up to the amount of their taxable compensation.

While the 529 to Roth IRA rollover provisions of SECURE Act 2.0 provide a unique planning opportunity for clients, several questions remain about the 529 to Roth IRA Rollover. For instance, neither Congress nor the IRS has clarified whether changing the beneficiary on an IRA would restart the 15-year clock for purposes of rolling over to Roth. It is also unclear whether the parent may change themselves to the beneficiary of the 529 before transferring the funds into their own Roth IRA. For these reasons, if parents are considering utilizing this new benefit, it may be advantageous to wait for further guidance before changing the beneficiary on a 529 plan (which
may restart the 15-year clock on the 529)

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