In recent days, Congress passed a $1.7 trillion spending bill. Like most spending bills that are passed, many things are put into the bill that no one can decipher. However, within the spending bill the SECURE Act 2.0 was passed, allowing eligible families with 529 plans to roll out leftover money within the 529 to a Roth IRA.
Many families use a 529 to save for college for their children. The money that is contributed then is able to be invested and (hopefully) grow. Then, once the child gets to college, the money is used for college expenses, whether that be tuition or room and board. In my experience the main question that is asked about a 529 is, “What if my kid doesn’t go to college?” Now there is an answer.
- Starting in 2024, you will be able to roll out leftover 529 money into a Roth IRA for the beneficiary. Yes, you read that correctly; it cannot be for the owner, but rather the beneficiary of the 529.
- Beneficiaries will be able to roll out a maximum of $35,000 from the account and into a Roth.
- The amount that can be rolled out each year is the annual contribution limit for that year. For example, if this rule would allow rollovers starting this year, a beneficiary of a 529 could only roll out $6,500 ($7,500 if over age 50) because that is the contribution limit into a Roth IRA for 2023. So, when we normally think of a rollover, we think the full account value, but in the case of a 529 to Roth rollover, the amount is whatever that year’s annual contribution limit is.
- The 529 must have existed for at least 15 years to be eligible for this rollover. So, just like investing into the market, the earlier you establish the 529, the better.
- Beneficiaries cannot rollover any contributions or earnings on those contributions into the 529 made in the previous five years.
Saving for college is a big deal, and now you can potentially save for both college and a child’s retirement. In order to take full advantage of the 529 provisions of the SECURE Act 2.0, it is important to consider the following:
- Start early – the earlier the better to allow growth in the account and also to ensure the 529 has been open for at least 15 years.
- In the past, many families opened a single 529 for multiple children, knowing if one child did not go to college, they could change the beneficiary to another child. Depending on the situation, that may need to be reconsidered.
- Those families worried that their children may end up not needing a 529 do not have to worry now. If their children do not end up using the 529, they can use those funds to help them start saving for retirement early.
Because everyone’s tax situation is different, it is always wise to consult a professional in order to understand how the SECURE Act 2.0 changes will apply to you. We at Financial Enhancement Group stand ready to assist you.
Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.
