New 529 Rollover Provision

For years, the 529 rollover has been a popular way for parents to save for their children’s education. These tax-advantaged accounts offer a variety of benefits, including tax-free growth and qualified withdrawals. However, one of the drawbacks of 529 plans has been that the funds may only be used for qualified educational expenses. As such, if a child did not end up going to college, or they had leftover funds after graduation, there were limited options for accessing the funds.

The good news is there is a new 529 rollover provision which provides more flexibility with 529 plans. The SECURE 2.0 Act, passed in December 2022, includes a provision allowing 529 plan funds to be rolled into Roth IRAs, in the name of the child, starting in 2024.

This means parents can now roll over up to $35,000 of unused 529 plan funds to a Roth IRA, per beneficiary, over their lifetime. This is a significant change that could significantly impact how parents save for their children’s education and beyond. Of course, there are rules to follow in order to qualify and be able to roll over funds to a Roth IRA for the beneficiary. Requirements include, but are not limited to the 529 plan must be under the beneficiary’s name for a minimum of 15 years, 529 plan contributions made in the last five years are ineligible, the rollover must be direct (no distribution), etc. Remember, tax laws are complex, and you should consult with a tax professional to ensure proper procedures and disclosures are followed.

What are the benefits of the new 529 rollover provision?

There are several potential benefits of the new 529 rollover provision for parents:

Increased flexibility: The new provision gives parents more flexibility with 529 plan funds. If a child does not end up going to college, or if they have leftover funds after graduation, parents can now roll over the money to a Roth IRA, where it can grow tax-free and can be accessed by the child upon the child’s retirement.

Tax-free growth: Roth IRAs offer tax-free growth on contributions and earnings. This means the money in a Roth IRA can grow tax-free for retirement, potentially providing a significant tax advantage over a traditional IRA.

Financial Planning benefits: With this new option of rolling over 529 plan funds into Roth IRAs, new planning strategies may be available to parents. Working with a qualified financial planner, the new rollover provision may be a valuable financial planning tool for parents who wish to transfer wealth to their children.

Things to consider before rolling over a 529 plan to a Roth IRA?

Before rolling over a 529 plan to a Roth IRA, consider the following:

Contribution limits: Roth IRAs have annual contribution limits. For 2024, the limit is $7,000 for individuals under the age of 50 and $8,000 for those 50 and older. This means you may not be able to roll over all the unused 529 plan funds to a Roth IRA in one year.

Impact on financial aid: If you are planning to apply for financial aid for a child’s education, rolling over money from a 529 plan to a Roth IRA could have a negative impact as 529 plan assets are generally not counted when determining financial aid eligibility, while Roth IRA assets are included.

Overall, the new 529 rollover provision is a positive development for parents saving for their children’s education. It provides more flexibility with 529 plan funds and offers potential tax advantages. However, it is important to carefully consider the timing, contribution limits, and impact on financial aid before rolling over money from a 529 plan to a Roth IRA.

At RJS LAW, our team of experienced tax attorneys advise clients on a wide range of tax issues including tax planning, audits, and collections. If you have tax questions, tax issues arising from your tax filings, or any other area of taxation, please call our office at 619-595-1655 for a free consultation.