529 Plan Rollover to a Roth IRA
529 plans have become significantly more beneficial thanks to the Secure Act 2.0. Under these new reforms to retirement and education laws in the U.S., individuals can now roll over funds from a 529 plan to a Roth IRA. Starting in 2024, beneficiaries can roll up to a lifetime total of $35,000 from a 529 plan to a Roth IRA established in their name. This change ensures the financial future and stability of the beneficiary, regardless of whether the funds are used for college or higher education.
It's important to be aware that rolling over funds from a 529 plan to a Roth IRA is subject to specific requirements, including earned income requirements, annual contribution limits, and income limits for Roth IRA contributions. While these limits and requirements may change over time, the current maximum annual contribution to a Roth IRA is $6,500.
A 529 plan is a tax-advantaged investment account designed to assist families in saving for a child's education. It offers valuable tax benefits, and almost anyone can open and contribute to a 529 plan, including parents, grandparents, and friends. Contributions to a 529 plan are made with after-tax money, and the investments in the account grow tax-deferred. Additionally, many states provide state income tax deductions for contributions to a 529 plan, and contributions are not subject to annual gift tax limits.
Previously, a limitation of 529 plans was the lack of flexibility in using the funds if the beneficiary received a scholarship, chose not to pursue higher education, or spent less than what was saved in the 529 plan. While it was possible to transfer the assets to a sibling or family member, penalties were imposed on non-qualified withdrawals. However, recent changes in the law have addressed this concern and made 529 plans more versatile.
To build generational wealth using a 529 plan, I recommend opening an account as early as possible after your child or grandchild’s birth since a Roth IRA conversion requires the account to be open for at least 15 years. The beneficiary of the 529 plan can be changed at any time, providing flexibility in determining who will benefit from the funds. By taking advantage of the new Roth IRA rollover provision, a 529 plan can serve as a powerful tool for long-term financial security and potentially leave a lasting legacy.
If you have questions about your 529 plan, reach out to the Bauman Scott team today!
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