529 Plans – A Potential New Wealth-Building Tool

The Securing a Strong Retirement Act (SECURE 2.0) that passed on December 29, 2022, brings major changes to retirement savings accounts. One important provision, effective in 2024, is the ability for a beneficiary of a 529 plan to transfer the plan’s funds into their own Roth Individual Retirement Account (IRA) without paying taxes or penalties.

What is a 529 Plan?
529 accounts encourage saving for future higher education costs while providing tax advantages. Typically, these accounts are sponsored by state governments and many states allow you to deduct your contributions on your state income tax return. The money can be withdrawn for qualified educational expenses without paying tax on any investment gains.

Currently, when money is put into a 529 plan, it can only be used to pay for qualified expenses (e.g., tuition, books, computer, and room/board). If the account is overfunded, there is no way to get the extra money out of the account without incurring a 10% penalty on the account’s earnings. Issues arise if your child receives a full scholarship that covers their cost of college or if they decide to not attend college.

Focus on Long-Term Wealth
The SECURE 2.0 Act addresses this issue by allowing beneficiaries to rollover funds into a Roth IRA. This change provides relief to parents and grandparents. If the funds in a child’s or grandchild’s account are not used for higher education, they can be rolled into an account that can benefit that child/grandchild later in life, becoming a valuable tool to transfer and build wealth over the long term.

The Details
There are certain restrictions to pay attention to when utilizing this new rollover feature. These include:

• Total lifetime limit eligible for transfer from a 529 plan to a Roth IRA is $35,000 per beneficiary.
• A Roth IRA must be established in the name of the child or grandchild.
• Annual contribution limits apply to transfers. For 2023, the contribution limit for IRAs is $6,500.
• The 529 beneficiary receiving the transferred funds in a Roth IRA is subject to the same earned income requirement that applies to all IRA contributions. (To make an IRA contribution, you or your spouse must have earned income.)
• The account must be open for at least 15 years to be eligible for a rollover.
• Contributions and/or earnings made in the 529 plan during the last five years are not eligible to be transferred to a Roth IRA.

Set Up a 529 Plan
The new provision may present an opportunity for parents or grandparents to open a 529 Plan and not only start saving for a child’s college but also get a jump start on their retirement savings. It is never too early to start saving. Speak with a Jemma Financial Advisor to determine if a 529 savings account is right for your family.