Upgrading the 529 Plan
Arguably, the most commonly used financial vehicle for college funding, the 529 plan, has recently undergone a massive upgrade. Thanks to the SECURE 2.0 Act, passed at the end of 2022, one of the strategy’s largest drawbacks now has an open back door.
Historically, one of the trickiest tasks of 529 owners has been adequately funding the account without over-funding the account. This is because it can be much harder to utilize the funds in a tax-efficient manner once the beneficiary’s qualified expenses are covered. No one wants to be hit with income taxes plus a 10% penalty as a result of saving too much.
Meet the New Option
Enter SECURE 2.0 and the new option to convert 529 funds to a Roth IRA for the beneficiary starting in 2024. This adjustment is a game changer for parents, 529 owners, and beneficiaries with funds left over after education expenses are covered. Parents, grandparents, and other benefactors can more confidently contribute to a child’s education, knowing that there are more options to avoid tax penalties should the account end up being over-funded. Keep in mind, however, that there are several rules that limit these conversions.
- The 529 plan must have been open for at least 15 years.
- The conversion must be for the same beneficiary as named in the 529 plan
- The rollover must come from funds that have been in the 529 for at least 5 years
- The conversion counts towards annual IRA contribution limits, meaning any IRA contributions made on behalf of the beneficiary would reduce the amount that can be converted in that year
- The lifetime limit per beneficiary is $35,000
To make things a little easier, we have included a handy chart below to help you determine whether this is a strategy you should consider.
Can-I-Make-A-529-To-Roth-Transfer-2024
Now, one of the first questions that many people started asking was whether they could benefit their own retirement planning by naming themselves as the 529 beneficiary once the child’s education expenses are covered. The government has yet to clarify this, but the general consensus is that changing the beneficiary would restart the 15-year clock mentioned above. That doesn’t rule out the strategy, but it definitely delays it.
Discover how converting your 529 plan to a Roth IRA could optimize your family’s financial future. Schedule a personalized consultation with one of our highly-skilled financial advisors today. We’d love to discuss how this strategy could contribute to reaching your financial goals.
Provista Wealth Advisors in Greenville, SC, provides peace of mind through personalized asset management, expert estate planning, and retirement planning. Navigate your financial journey with confidence. Rest Assured, We Have A Plan. Give us a call at (864) 696-2410 or send us a message to schedule your free introduction meeting.