Changes for Unused Funds from 529 Plans Beginning in 2024

To address investor concerns related to 529 Plan savings going unused, a provision of SECURE ACT 2.0 allows the opportunity to rollover unused 529 education savings into a Roth IRA in the beneficiary’s name, penalty free. As a result, investors should feel a sense of relief about leftover 529 savings that weren’t used for education. Likewise, parents of younger children may have more confidence about saving in a 529 plan knowing they have this option for future unused 529 assets.

Of course, the increased flexibility surrounding 529 savings is not without some constraints. Below is a list of items that investors should be mindful of:

• Effective beginning in 2024.
• The lifetime limit eligible for rollover to Roth is $35,000 per beneficiary.
• 529 account must have been open for at least 15 years before making the rollover to avoid taxes and penalties.
• The amount that can be rolled over each year is limited to the Roth IRA contribution limit for the year ($6,500 in 2023, $7,500 for those 50 and older), less any other Roth IRA contributions.
  • As an example, if the beneficiary contributed $3,000 to their Roth IRA, the amount remaining that could be rolled over from the 529 plan is $3,500.
• Roth IRA beneficiary must be the same beneficiary of the 529 plan.
• Contributions (and investment earnings on those contributions) made within the last 5 years are not eligible for rollover to a Roth IRA.

Given the annual rollover limit, coupled with the restrictions on contributions made within the last 5 years, this rollover strategy may take more than one year to complete depending on the size of the rollover.

Once in the Roth IRA, the funds can now be used for other purposes beyond education, such as retirement savings.

This new consideration may allow families to begin saving for a child’s education AND/OR retirement at an early age. By opening a single 529 Plan early on, contributions and growth could accumulate for 18+ years, and up to $35,000 of unused funds (per beneficiary) could be rolled over to a Roth IRA, kickstarting retirement savings. With an initial rollover of $35,000 after college plus annual contributions of $6,500/year and a reasonable investment return of 6%, the balance of the Roth IRA could exceed over $1,000,000 by the beneficiary’s retirement age.

Important Note:

Whether or not 529 rollovers to a Roth IRA are determined to be a qualified distribution for state tax purposes will depend on each state. States are still working out these details.

Please reach out to your Rockbridge advisor with any questions.