The new feature of the Secure Act 2.0 legislation allowing 529 plan account beneficiaries to roll over funds into their Roth IRA is now available starting in 2024. You would avoid the normal 10% withdrawal penalty when funds are not used towards qualified education expenses.
Qualifications and limitations
As a reminder, here are the qualifications/limitations you must meet to take advantage of this feature.
The account must be set up for at least 15 years before you can utilize this feature. If you’re looking at setting up a 529 account for your kid(s), the sooner, the better with this consideration, in addition to the power of more time for compounding.
The Roth IRA account holder must be the same as the 529 beneficiary
There’s a lifetime cap of $35,000 per person/account owner. So, intentionally overfunding a 529 is limited.
The 529 beneficiary must have earned income to be able to roll over funds from a 529 to a Roth IRA. The 2024 Roth IRA limits are $7,000 annually (under 50) / $8,000 (over 50). You’re limited to the lesser of your earned income or the maximum.
For example, if you only earned $4,000, you could only roll over $4,000 from your 529 to your Roth IRA.
Rollovers are subject to the annual Traditional and Roth IRA contribution limits (less if you’ve made any contributions directly);
I.e., You made a $1,500 contribution to your Traditional IRA in 2024. The Traditional/Roth IRA maximum is $7,000; you would only be able to roll over $5,500 to your Roth IRA, given you meet the other qualifications
There are no maximum income limits on completing the rollover like there are for Roth IRA contributions
You cannot transfer contributions and earnings made in the last five years before distributions start.
Still to clarify
What still needs to be clarified by the IRS regarding the legislation:
It has not been determined if you change the beneficiary of the 529 if that resets the 15-year clock.
Reminder: If there are still leftover funds for one of your 529 beneficiaries/accounts, you can always transfer the account to another family member to utilize for their education expense needs. It isn’t known whether you could still utilize the 529 to Roth rollover feature if you do this.
If you roll over funds from one 529 plan to another, it is unclear if that resets the 15-year clock to the 529 plan you are transferring them to or if some other method would be used.
This new feature can further emphasize school choice while removing some of the worry of having excess 529 funds or funding a 529 if a child decides not to pursue higher education or has more than they need for trade or vocational school. The child can still benefit from your early 529 contributions by jump-starting their retirement early.
Whether this is something you should take advantage of depends on your family's situation. If you are looking for guidance around education planning and saving for yourself or your children, meet today with your Whitaker-Myers Wealth Managers financial advisor to help you achieve your financial goals and objectives.
New Features Available in 2024 for 529’s and Roth IRA Rollovers
February 26, 2024
Andrew Young
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