November 27, 2023

The SECURE 2.0 Act of 2022 (Setting Every Community Up for Retirement Enhancement) comes into effect on January 1, 2024, allowing unused funds from a tax-advantaged 529 Education Plan to roll over into a Roth IRA.

Starting in 2024, 529 Plans that have existed for a minimum of 15 years are permitted to take advantage of the tax-free rollover plan. This change allows the unused funds in a 529 Plan to be turned into retirement savings.

The rollover plan is subject to the Roth IRA annual contribution limits ($6,500) and a 5 year look back period from when funds were deposited. There is also a lifetime maximum total of $35,000 that can be rolled over.

Before this new rule, any funds not used for education were subject to a 10% penalty tax upon withdrawal; now, the unused 529 Plan funds can roll over, tax-free, into a Roth IRA.
To illustrate the potential of this new rule, we can look at a hypothetical granddaughter as an example:

  • Granddaughter was born in 1999. Her maternal grandparents immediately set up a 529 Plan for her college education. Grandparents contributed $2,500 each ($5,000 total) to the Plan each year until granddaughter graduated from high school.
  • By 2017, granddaughter had $100,000 in the 529 Plan and was accepted to college with a generous scholarship. Factoring in the scholarship, the total cost for granddaughter’s college education was $75,000. In 2021, granddaughter graduated from college debt-free with a $25,000 balance in the 529 Plan.
  • Under the former rule, granddaughter must either pay a 10% tax on the withdrawal of the remaining $25,000, or the grandparents needed to find a new beneficiary to use the remaining funds for education. Her grandparents planned for her to be able to use this money for education tax-free and had no other grandchild to transfer the 529 Plan to.
  • Come January 2024; grandparents can begin to divert the money into a Roth IRA for the granddaughter’s benefit. Since none of the funds are subject to the five-year lookback period, and grandparents created the 529 Plan 22 years ago, they can make yearly contributions of $6,500 into the Roth IRA going forward until all of the $25,000 is transferred to the Roth IRA.
  • If the Roth IRA accrues interest on these remaining funds from the 529 Plan at a 7% interest rate, granddaughter will have about $1,000,000 for retirement if she retires at age 65. This number assumes she continues with yearly contributions of $6,500 from her paycheck.

This rule change allows you to make the most use of your unused 529 Plan funds. If you have unused 529 funds, contact your banker or broker for more information on how to start this process next year.

If you have any questions or concerns about these developments or your specific business needs, contact one of our offices.