529 plans are widely regarded as an excellent option for individuals looking to save for education expenses. These plans offer numerous benefits, such as tax-free growth and the ability to claim a state tax deduction on contributions.

A common argument against starting a 529 college savings plan for children is the uncertainty whether the child will even attend college, and if they will even need the money (Scholarships, financial aid, etc.).

Thanks to the SECURE Act 2.0, some of this concern is alleviated by allowing distributions from 529 plans to Roth IRAs. Starting in 2024, unused 529 funds can be transferred to the beneficiaries retirement savings without any taxes or penalties.

Until recently, there were only a few planning options for the leftover 529 funds. You could change the beneficiary to a member of the family, withdraw up to $10,000 to pay toward qualifying loans, or simply withdraw the money for nonqualified use, resulting in income tax and a 10% penalty applied to the earnings.

With the new rule, the 529 plan has become even more valuable due to the Roth conversion option. Here are the details:

  • Lifetime maximum of $35,000
    The total lifetime limit for transfers from a 529 plan to a Roth IRA is $35,000 per beneficiary. Rollovers can begin in 2024.
  • Annual contribution limits still apply
    For 2023, the current contribution limit is $6,500. However, income eligibility limits do not apply.
  • Must be open for at least 15 years
    The 529 account must be open for at least 15 years. Contributions made to the 529 plan within the last five years are not eligible to be rolled into a Roth.
  • Same beneficiaries
    The Roth IRA must be established in the name of the 529 beneficiary.

One question that still remains is whether changing the 529 beneficiary would trigger a reset to the 15-year clock requirement. We still need to wait on more guidance from Congress on this.

Bottom Line
The new provision provides an opportunity for parents to jump-start retirement savings for children while saving for college at the same time. Parents have the flexibility to name themselves as beneficiaries and change the beneficiary to a child in the future. If not, the parents could remain the beneficiary and transfer the funds to a Roth IRA for themselves.

With this added benefit, the value of a 529 plan has increased, making it a wise decision to consider contributing.

George Maroudas
Twitter @ChicagoAdvisor

Disclaimers and Sources:

Stock investing includes risks, including fluctuating prices and loss or principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.

Prior to investing in 529 Plan investors should consider whether the investor’s or designated beneficiary’s home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state’s qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.