Starting in 2024, 529 educational savings plans will receive a significant boost in their appeal – thanks to enhanced tax benefits. The introduction of the SECURE Act 2.0, passed into law in late 2022, brings exciting opportunities for 529 plan beneficiaries. But it’s essential to understand the rules and limitations surrounding all available choices for managing excess 529 funds. So, let’s explore these options and uncover how the SECURE Act 2.0 can shape the financial futures of students and their families.
SECURE 2.0
The SECURE Act 2.0, which became law late in 2022, enables 529 beneficiaries to place unused 529 funds into their Roth IRA without penalty. But it’s important to understand that the rollover can only be made to 529 beneficiary’s Roth IRA, not a parent’s account.
This new rule can have an incredible impact on the student’s ability to successfully fund a comfortable retirement, thanks to the power of compound interest.
OTHER OPTIONS:
You can still change a 529 plan beneficiary to another qualifying family member. But the funds would have to be used for educational purposes. Alternatively, you could withdraw excess funds and pay a 10% penalty.
OBEY THE RULES:
As with most tax laws, numerous rules govern a 529 plan to Roth IRA rollover. Keep these in mind:
- A maximum of $35,000 can be rolled over from a 529 plan to a beneficiary’s Roth IRA.
- Annual Roth IRA contribution limits apply to rollovers. For example, if this law were already in effect, the 2023 Roth IRA contribution limit would be $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA.
- Conversions can only be made to a beneficiary’s Roth IRA; a parent saving with a 529 plan in a child’s name cannot convert unused funds back into their account.
- Rollovers are prohibited until a 529 account has been open for at least 15 years.
The intricacies of tax laws and individual circumstances require personalized advice. So let Boris Benic and Associates help you gain a comprehensive understanding of how the SECURE Act 2.0 can shape your specific financial goals and maximize the benefits of your 529 plan.