Have Unused 529 College Savings? Roll Them Into a Roth
In December 2022, Congress passed the SECURE 2.0 Act, introducing significant changes that could shape the future of retirement savings and student loans. Scheduled to take effect in 2024, these new provisions stand to impact how families manage their financial planning.
In this article, we delve into how these changes affect unused 529 college savings accounts and what this means for your financial strategies moving forward.
New Opportunities for 529 College Savings Accounts
A 529 college savings plan is a tax-advantaged tool designed to help families save for their children's higher education expenses. With the SECURE 2.0 Act, Congress has expanded the utility of these accounts by introducing a fresh rollover option, particularly beneficial for surplus funds after the beneficiary completes their education.
Starting in 2024, a beneficiary of a 529 plan can roll over up to $35,000 into a Roth IRA, free from taxes and penalties. This presents a new avenue for utilizing funds that may otherwise remain unused after educational needs are met.
However, there are specific guidelines to follow in order to capitalize on this opportunity:
01 | Annual and Lifetime Contribution Limits
Any rollover from a 529 account is subject to the annual contribution limits of a Roth IRA. For instance, if the Roth IRA contribution limit remains at $6,500 in 2024 for individuals under 50, you can roll over an amount up to this threshold, inclusive of any annual contributions withheld from your income. Moreover, there's a lifetime cap of $35,000 for rollover contributions.
02 | The 15-Year Rule
To qualify for tax and penalty-free rollovers, the 529 plan must have been active for at least 15 years. This timeframe commences from the plan's initial opening, typically undertaken by a parent or grandparent. It's crucial to note that changing the beneficiary of the 529 plan at any point may potentially reset this 15-year clock.
03 | 5-Year Rollover Restriction
Funds contributed to the 529 plan within the last five years before the rollover date are ineligible for transfer. Only contributions made outside of this five-year window are eligible for rollover. As time progresses and the five-year window shifts away from the most recent contributions, additional rollovers become feasible.
Real-World Scenarios
Consider these scenarios to understand how these rules apply:
Scenario 1: A 529 account was opened in 2001 by your mother, who contributed annually until 2020. After your graduation in 2022, surplus funds remained in the account. In 2024, you decide to roll over funds into a Roth IRA. Given the account's 15-year tenure, you can rollover funds up to the annual Roth IRA limit, but contributions made between January 1, 2019, and January 1, 2024, are excluded.
Scenario 2: Your father established a 529 account in 1998, contributing annually until your trade school graduation in 2015. You and your employer added $3,000 to your retirement account this year. With $10,000 left in the 529 account, you plan a rollover into a Roth IRA in 2024. Since all contributions were made over 15 years ago, the entire balance is eligible. However, the maximum rollover in 2024 is limited to $6,500 due to annual contribution constraints.
Grandparent-Owned Account Benefits
A notable enhancement under the SECURE 2.0 Act pertains to 529 accounts owned by grandparents or third parties. Previously, withdrawals from such accounts for educational expenses counted as untaxed income on the student's FAFSA application, potentially impacting federal financial aid eligibility.
With the new legislation, withdrawals from grandparent-owned 529 accounts for education costs will no longer be classified as untaxed income. This adjustment helps safeguard student eligibility for federal aid, offering more flexibility in funding educational pursuits.
Planning for Your Financial Future
While navigating these legislative changes, it's crucial to safeguard your financial assets. Your retirement savings likely represents a significant component of your financial portfolio, necessitating careful management and planning.
To ensure your financial strategies align with your long-term goals, consider consulting with us. We're dedicated to understanding your family's aspirations and can provide tailored guidance to protect your assets and secure your legacy.
Reach out to us today to explore how we can assist you in navigating these changes and planning for the future with confidence.
Schedule a free 15-minute discovery call to get started.
This article is a service of Zarda Law, S.C. We do not just draft documents; we ensure you make informed decisions about life and death, for yourself and the people you love. That's why we offer a Legacy Planning Session, during which you will get financially organized and make all the best choices for the people you love. You can begin by scheduling a Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.
