Aviva Pinto is a CDFA, CDS and Managing Director and Wealth Manager at Wealthspire Advisors.
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A 529 college saving plan is a tax-advantaged savings plan to help save and pay for education. It was originally limited to post-secondary education costs. In 2017 it was expanded to cover K-12 education and to cover apprenticeship programs in 2019.
Section 529 of the Federal Tax Code created the law, but each of the 50 states and the District of Columbia administer them. Some states allow a state tax deduction on the contributions.
Until recently, your choices were limited if your child graduated and you had a balance remaining in the 529 account. You could have used the balance for a graduate degree, trade school or other higher education purposes. Or, use the money for a sibling or a relative (including yourself). But, the money had to be for educational purposes such as tuition, fees or room and board.
Taking the excess money out for anything else and you would have incurred taxes and a 10% penalty unless you had qualified for an exception (death of the original beneficiary, permanent disability, attendance at a U.S. military academy, or distributions equal to the amount of scholarships or other tax-free assistance received).
That has all changed thanks to the Secure Act 2.0. The new law permits the beneficiary of a 529 college savings account, that was open for more than 15 years, to roll over the remaining funds into a Roth IRA. This law will be for distributions that would have begun in 2024.
This will be a game changer for many parents who were hesitant to contribute to a 529 plan for fear that the money would not be used because the child did not attend college, or it would accumulate too rapidly, overfunding the 529 account and having money left over.
Starting in 2024, the Secure Act 2.0 allows any remaining balance in a 529 account to be rolled into a Roth IRA for the same beneficiary. Therefore it will continue to accumulate tax-free through retirement.
As with any law, there are a few restrictions:
• The Roth IRA must be in the name of the 529 plan beneficiary—not the account owner.
• As mentioned above, the 529 plan must have been in effect for 15 years.
• Contributions and earnings within the past five years do not qualify for the rollover.
• The maximum amount that can be rolled over is $35,000.
• Roth IRA annual contribution limits still apply ($6,500 in 2023). Therefore, if you plan to roll the maximum $35,000 over, it will take more than five years to have the full excess rolled over.
The benefits of this new change are numerous. Because contributions to a Roth IRA are made on an after-tax basis, the beneficiary can withdraw the contributions after the age of 59 1/2 tax-free. They do not have to take the minimum required distributions from a Roth IRA. And, they can also pass the money on to heirs tax-free.
Remember, the Secure Act 2.0 is a federal law, so you will have to check your individual state’s requirements and follow any changes by the IRS. It is best to consult with a tax accountant before making any moves.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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