This article contains some new SECURE Act 2.0 regulations involving 529 funds to Roth IRAs. Read to see how these changes can apply to your retirement.
We’re getting a lot of questions about the SECURE 2.0 provision allowing tax-free rollovers from 529 plans to Roth IRAs. Although this new rollover opportunity sounds exciting, there are a number of restrictions that may limit its appeal.
Section 529 plans offer a great opportunity to pay for college, K-12 tuition and student loan repayments. Nearly every state offers at least one plan. The most popular type of 529 plans are college savings plans, in which you make after-tax contributions that are invested in mutual funds or ETFs offered under the plan. Earnings grow tax-free, and you can withdraw the account tax-free if you use it for qualified educational expenses. You also may be able to take a state tax deduction for at least part of your contribution.
However, sometimes parents wind up not using the entire 529 account because, for example, their child gets a scholarship or doesn’t go to college. If you withdraw funds and don’t use them for educational expenses, the earnings in your account will be subject to income tax and a 10% penalty. The risk of unused funds has caused many parents to fund 529 plans conservatively or not to fund them at all.
In SECURE 2.0, signed into law on December 29, 2022, Congress attempted to address this problem. Starting in 2024, beneficiaries of 529 college savings accounts (e.g., children or grandchildren) will be allowed to do a tax-free rollover of up to $35,000 to a Roth IRA.
As usual, however, the “devil is in the details.” Here are those details:
By Ian Berger, JD
Ed Slott and Company, LLC