SECURE Act 2.0: Introducing Tax-Free 529 to Roth IRA Rollovers.

529 college savings plans are a popular tool to help families save for college. The beneficiary of a 529 account may withdraw money from the account income tax and penalty free to pay for college-related expenses. However, the problem with 529 accounts has always been what to do with money left over in the account if the beneficiary either doesn’t need all of it or doesn’t go to college. Typically, an account custodian would either change the beneficiary, or liquidate the account and pay the associated income and penalty taxes.

However, thanks to a provision contained in SECURE 2.0, a solution to the dilemma is at hand. Beginning in 2024, the beneficiary of a qualifying 529 account may roll over unused 529 funds into a Roth IRA income tax and penalty free.

Several requirements must be met before a an individual may take advantage of this opportunity: a) The 529 account must have been maintained for a minimum of 15 years; b) The 529 beneficiary must be the owner of the Roth IRA; c) Rollover contributions are subject to the annual IRA contribution limits; d) An individual may not transfer any contribution made to the 529 account (plus earnings on those contributions) within the 5-year period preceding the rollover; e) 529 to Roth IRA rollovers are subject to a lifetime limit of $35,000; and f) The 529 beneficiary must have earned income in the year of the rollover.

Not mentioned in the SECURE 2.0 legislation is whether the beneficiary of the 529 account must have been so for at least 15 years prior to the rollover. It seems that the length of time an individual has been the beneficiary of a 529 account won’t matter as the text focuses on the age of the account. By focusing on the age of the account, it appears that Congress may be trying to prevent this from becoming another “backdoor” Roth conversion strategy. Even more so since it’s possible an account beneficiary may need to be changed at some point during the life of the account. Under this reading a parent could name themselves as the beneficiary and transfer at least a portion of a remaining 529 balance to their own Roth IRA. We don’t know for sure at this point, so we’ll have to keep an eye on this one for the IRS to issue guidance in the future.

This change in the law could make a difference for many 529 beneficiaries who end up not using up their account funds. A 529 to Roth IRA rollover could provide a nice retirement savings stake for younger individuals in a tax-free environment.

I like to recommend that individuals start a Roth IRA as early as possible, and this gives savers another opportunity to do so! While questions remain, this SECURE 2.0 provision could have significant benefits for 529 beneficiaries.

Do you have questions about Roth IRA rollovers in general? Give me a call, I can help.