529 Plan Secure Act 2.0: New Rollover Opportunities Explained
I want to delve into an intriguing topic, 529 plans and Roth IRAs. I’d like to highlight some key changes brought about by Secure Act 2.0. These developments could open up some interesting opportunities for investors and families alike.
After my previous video on Secure Act 2.0, I received feedback, which made me realize that not everyone has an advisor. Or for that matter, has a firm that deeply engages in detailed planning. I often assume my audience is familiar with certain subjects, such as the increased contribution limits on IRAs, Roth accounts, and 401(k)s.
However, conversations with many individuals showed me that there might be a need for videos on the original 2019 Secure Act. So please, keep sending feedback, it helps us tailor our content to your needs.
Understanding 529 Plans and Roth IRAs
For those who may need a refresher, here’s a quick rundown: a Roth IRA lets you invest after-tax money for future growth. Roth IRAs let your money grow tax-deferred and allow tax-free withdrawals when you follow the rules. A big benefit for heirs is that those withdrawals remain income tax-free.
A 529 plan helps cover education costs. Like Roth IRAs, you fund it with after-tax money, and growth is tax-deferred. However, 529 withdrawals are tax-free only when used for approved educational expenses. Using them for anything else brings taxes and penalties.
Key 529 to Roth IRA Changes Under Secure Act 2.0
Secure Act 2.0 introduces notable changes to 529 plans. One striking new rule, effective 2024, is that a 529 plan that’s been active for at least 15 years can transfer up to $35,000 to the beneficiary’s Roth IRA. The Roth IRA owner must also be the 529’s named beneficiary.
In 2023, for instance, the IRA contribution limit is $6,500 for individuals under 50. Under Secure 2.0, the transfer does now require a minimum amount of earned income on the child’s part to proceed, the income must be equal to the rollover amount. Over about six years, you can move $35,000 from a 529 to a Roth IRA, creating a strong retirement foundation.
What Families Should Know
Know the key restrictions before moving unused 529 funds into a Roth IRA. The Roth IRA recipient must be the same as the current beneficiary of the 529 plan. The 529 must have been active for at least 15 years. And contributions from the last five years, including their earnings, don’t qualify for transfer.
Secure Act 2.0 aims to turn unused education funds into early retirement savings. This is especially helpful for wealthy families. It also gives families more options for changing the beneficiary to another relative.
Planning Opportunities
While these new rules provide exciting opportunities, it’s essential to remember there are other personal planning considerations to discuss with professionals. These rules are still new, so we may see more IRS or Congressional updates soon.
If you’re unsure how these changes may impact your financial plan, we invite you to reach out to our team at Retirement Prosperity Group and Prosperity Advisers LLC. We’re here to help you make the most of every opportunity.
As always, happy planning!
If you are considering using this rollover provision, it is advisable to consult a qualified financial advisor or tax professional to understand how these rules apply to your specific situation and to stay updated on any IRS guidance or legislative changes.