529 Rollover to a Roth IRA – What You Need to Know

Key Points – 529 Rollover to a Roth IRA – What You Need to Know

First, Congrats to the Class of 2023!
What Is a 529 Plan?
529 Rollovers to Roth IRAs Are Another Welcomed Change in the SECURE Act 2.0
Highlighting the Conditions of 529 Rollovers to a Roth IRA
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Congratulations, Graduates!

Few things bring parents/grandparents more joy than watching their child/grandchild graduate from high school or college. If one of your children or grandchildren graduated this spring, please extend our sincere congratulations to them from the entire Modern Wealth Management team!

Exciting News Regarding 529 Plans

Many of our Modern Wealth clients have prioritized supporting their children/grandchildren via 529 plans. According to Saving for College, a 529 plan is “an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary.” A 529 plan can be utilized to pay for various educational expenses. Those expenses range from college and K-12 tuition to paying back student loans to apprenticeship programs.

529 plans have made more headlines this year because of a change that will go into effect next year. Effective January 1, 2024, a 529 plan can rollover to a Roth IRA under certain conditions. That was one of the initiatives included when the SECURE Act 2.0 was passed late last year. We’ll go into more detail about what that 529 Roth IRA rollover means for 529 plan account owners and their beneficiaries shortly. But first, let’s first look at some of the pros and cons of 529 plans prior to this new legislation.

What Happens If Plans Change for Your Child or Grandchild?

While the tax benefits can make 529 plans very appealing to parents and grandparents, it’s important to remember that your child or grandchild’s future can change on a whim when they’re in their late teens or early 20s. They might decide that college isn’t for them or not need the funds in the 529 plan to complete their education.

In either case, your goal of supporting your child or grandchild likely still won’t change. But you obviously don’t want to have the funds in the 529 plan go to waste. This way, the beneficiary of your 529 plan can still utilize those funds to get a head start on planning for retirement. And, of course, the Roth is tax-free. That’s likely better than most graduation gifts that they would receive.

What Are the Conditions of 529 Rollovers to Roth IRAs?

Now, let’s get to some of the particulars of the 529 Roth IRA rollover. For 529 college savings accounts, beneficiaries can do a maximum rollover of $35,000 that must be done during their lifetime. The rollover can be done from any 529 plan in their name. Just make sure to keep retirement account contribution limits in mind when doing any 529 Roth IRA rollover. For 2023, the Roth IRA contribution limit is $6,500. If you’re 50 or older, that can be $7,500 with a catch-up contribution.

There are a couple more limitations to the rollover that you need to be aware of. First, your 529 plan must be established for 15 years before you can take advantage of a Roth IRA rollover. Second, there’s another aspect of the Roth IRA five-year rule to be aware of. Funds that you contribute to the 529 plan can’t be rolled over until you’ve surpassed a five-year holding period.

Congress’s Reasoning Behind the 529 Rollovers to Roth IRAs

Dean Barber and Bud Kasper shared earlier this year on America’s Wealth Management Show that SECURE 2.0 brought some rare welcomed changes to retirement rules from Congress. The 529 Roth IRA rollover was certainly a part of that good news from Congress. The excerpt below on 529 rollovers to Roth IRAs was included in Section 126 of the SECURE Act 2.0, which shed some light on why it was passed.

“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.” – SECURE 2.0, Section 126

Do You Have Questions About 529 Plans?

529 plans were already a nice gift idea for your children or grandchildren. The ability to do a Roth IRA rollover from your 529 plan is another gift in of itself. We want to make sure that you understand the tax benefits of 529 plans and how they can benefit your children or grandchildren. It really highlights some of the positive attributes of family financial planning.

If you have any questions about 529 plans, please feel free to reach out to us. You can schedule a 20-minute “ask anything” session or a complimentary consultation with one of our CFP® Professionals by clicking here. We can meet with you in person, virtually, or by phone.

We also want to make sure that you and your family understand how a 529 plan is just one small part of a comprehensive financial plan. If you and/or your loved ones don’t have a financial plan, we encourage you to check out our industry-leading financial planning tool to begin building a forward-looking plan that gives you confidence that you’re doing the right things with your money, freedom from financial stress, and time to spend doing the things that you love. You can use our tool from the comfort of your own home and at no cost or obligation. Just click the “Start Planning” button below and you and/or your loved ones will be on your way.

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Our financial planning tool is intended for professional use, so don’t hesitate to reach out with any questions. We want to help you and your family get to and through retirement with clarity and confidence.

Resources Mentioned in This Article

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management, LLC does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.