In December 2022, Congress passed the SECURE 2.0 Act, bringing significant changes to the world of retirement savings and student loans. Two key parts of the Secure 2.0 Act are set to take effect in 2024 and could substantially impact your family’s financial future.
In this blog, we explain how the new law affects your unused 529 college savings account and what that means for your future savings.
You Can Now Roll 529 College Savings Into A Roth IRA
A 529 college fund is a tax-advantaged savings account designed to help families save for their children’s college education. With the SECURE 2.0 Act, Congress expanded how you can use these accounts by introducing a new rollover option, which is especially helpful if the beneficiary has money left over after their education.
Beginning in 2024, a 529 plan account beneficiary will have the opportunity to roll over up to $35,000 from your 529 college savings plans into a Roth IRA – and the best part is it’s tax and penalty-free.
But there are some rules you’ll need to follow to take advantage of this retirement fund boost:
01 | Annual and Lifetime Contribution Limits
Any rollover from your 529 account is subject to annual Roth IRA contribution limits. For example, suppose in 2024, the Roth IRA contribution limit remains the same as in 2023 ($6,500 for individuals under 50). In that case, you can roll over an amount up to this limit, including yearly contributions withheld from your income. There is also a rollover contribution limit of $35,000 over your lifetime.
02 | The 15-Year Rule
The 529 plan must have been open for at least 15 years to qualify for tax and penalty-free rollovers. This 15-year clock starts ticking from the day the 529 plan was initially opened, usually by a parent or grandparent. It’s crucial to remember that changing the beneficiary of the 529 plan at any point may potentially restart this 15-year clock.
03 | 5-Year Rollover Blackout
You cannot roll over funds that were contributed to your 529 plan within five years of the rollover date. Only contributions made outside of this five-year window are eligible. But, you can continue to rollover funds as time passes and the 5-year window moves farther away from the most recent contributions.
Here’s an example of how these rules work in real life: Imagine your mother opened a 529 account for you in 2001. She contributed money to the account every year for 20 years through 2020. When you graduated college in 2022, some funds were left in the 529 account. You want to roll over these funds into a Roth IRA on January 1, 2024.
The account has been open for at least 15 years in this scenario. Therefore, you can roll over funds into a Roth IRA up to the annual contribution limit of $6,500. But, the funds you roll over from the 529 cannot include those your mother contributed in the 5 years before your January 1, 2024 rollover date. That means you can’t roll over funds contributed to the 529 account between January 1, 2019, and January 1, 2024.
Let’s look at another example: Your father opened a 529 college savings account for you in 1998 and contributed money every year until you graduated from trade school in 2015. Since graduation, you and your employer have contributed a total of $3,000 to your retirement account this year. The account has $10,000 left, and you want to roll over the funds into a Roth IRA on January 1, 2024.
In this example, the account has been open for over 15 years, and all the funds were contributed to it more than five years ago. Therefore, all of the funds are eligible for a rollover. However, you can only contribute up to $6,500 to your retirement accounts annually. Because of this, you can only roll over a maximum of $3,500 from your 529 account into your Roth IRA this year if you or your employer don’t make any more contributions to your retirement this year. After the rollover, you’ll have $6,500 in your 529 account at the end of 2024.
In 2025, you can roll over the remaining $6,500 from your 529 into your Roth IRA (if you make no other contributions from your income that year).
An Extra Bonus for Grandparent-Owned Accounts
Students must disclose their personal and family financial information on the Free Application for Federal Student Aid (FASFA) to be considered for federal financial aid. Funds in a 529 account created by a parent count as the student’s financial asset on the FAFSA application.
However, funds in a 529 account owned by a grandparent or other third party have never counted as an asset for FAFSA purposes. Only money withdrawn from the account is considered untaxed student income, which FAFSA considers in its application review.
The big news is that with the new Secure 2.0 Act, any withdrawals from a grandparent-owned 529 for education expenses will no longer be considered untaxed student income, which means the funds will not hurt the student’s eligibility for federal aid.
Planning for What’s Really Important
While you take steps to secure your financial future, don’t forget to protect everything you’ve worked so hard to build. Your retirement savings are likely the largest asset you own, and making sure they’re managed and passed on in the best way possible is essential for your well-being and the future well-being of those you love.
To make sure there’s a plan for your future, call our office. We’d be honored to learn more about your goals for your family and share with you the unique process we use to ensure everything you own and everyone you love is cared for, no matter what.
This article is a service of Ruberg Law PLLC. We don’t just draft documents; we ensure you make informed, empowered decisions about life and death for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™. During the session, you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this valuable session at no charge.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you seek legal advice specific to your needs, such advice services must be obtained independently, separate from this educational material.