The New 529 Plan Rules: An Option to Save for College and Retirement

Key takeaways

• The Secure Act 2.0 now allows 529 plans rollover to a Roth IRA.
• Account owners must understand critical guidelines, such as holding times for 529 plans and the maximum contribution limit.
• We anticipate that the popularity of 529 plans will increase because of the increased flexibility.

529 plans offer tremendous benefits, especially when earmarked for education expenses, thanks to their potential tax advantages. These plans have always been a go-to choice for investors concerned about saving for education. With the new Secure Act 2.0, many people ask us “Can you roll a 529 into a Roth IRA?” That is the question we will answer in this blog post. The short answer is yes.

Keep reading if you want to know more about how to integrate the 529 Roth rollover as part of your retirement plan strategy.

Pros of having a 529 plan

The primary advantage of investing in a 529 plan is the opportunity to avoid taxes on its growth. The more growth you have, the bigger your tax benefit could be. That’s why it’s often recommended to start a 529 plan as early as possible to maximize long-term savings needs with more tax benefits.

Additionally, it’s essential to explore the tax benefits offered by each state, as they vary. By doing so, you can maximize the advantages of your 529 plan according to your state’s specific regulations.

Cons of having a 529 plan

The main worry with a 529 plan was if beneficiaries chose not to go to college as planned. For example, they might choose to take a job offer instead of going to college. Or they might choose to travel and become a professional YouTuber.

Regardless of the reason, if the 529 plan had unused funds that were withdrawn for purposes other than qualified education expenses, they would have been subject to taxation at your ordinary income tax rate and penalized with a 10% penalty.

Important Considerations When You Convert 529 to Roth IRA

• There is a $35,000 lifetime limit per recipient.
• Annual Roth IRA contribution limit applies when you roll over. For example, if new Roth IRA owner’s contribution limit is $7,000, you can roll over up to $7,000 that year. Any remaining amount can be rolled over in later years.
• The beneficiary needs to have earned income, which can also affect the contribution limit of the Roth IRA for that year based on the earned income. In simple terms, you can only roll over an amount equivalent to what you can contribute to your Roth IRA as an individual. Consult with your tax accountant to confirm your eligibility.
• The beneficiary of the 529 plan will need to stay the same as the Roth IRA account owner.
• 529 plans must have been open for at least 15 years.
• The amount being rolled over into a Roth IRA must have been contributed to a 529 plan at least 5 years before the transfer.
• Income limitations of contributing into a regular Roth IRA doesn’t apply.

We expect to see an increase in the popularity of the 529 plan. With the new flexibility, families will have an option for 529 conversion to Roth IRA. Saving early for college is especially important considering the education-related inflation rate.

Be sure to seek guidance from a financial planner to assess whether this option meets your current financial needs. Feel free to contact us to learn how you can leverage this new 529 Roth IRA conversion to enhance your wealth.

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