Saved Too Much in a 529 Plan? A New Solution is On the Way!

January 23, 2023

In December 2022, President Biden signed into law SECURE 2.0 which contains a variety of changes to help strengthen the nation’s retirement programs.

One of the provisions in the new law permits a 529 Plan account beneficiary to roll unused dollars from a 529 Plan into a Roth IRA. A 529 Plan, as you may recall, is a tax-advantaged savings plan designed to help pay for education. The funds in a 529 Plan can be used for K-12, college, and even apprenticeship education programs. Lawmakers were concerned that taxpayers were not taking full advantage of 529 Plans for fear that any unused monies in a 529 Plan may be subject to taxes and/or penalties when withdrawn for purposes other than education costs. The new law, which goes into effect in 2024, is intended to alleviate those taxpayer concerns by permitting unused 529 Plan dollars to be rolled into a Roth IRA. This will undoubtedly free up those trapped funds and help Roth IRA owners build financial resources for retirement. But watch out!

The SECURE 2.0 act specifies rules and conditions that must be met before the 529 Plan funds can be safely rolled into the Roth IRA. Among those conditions:

  • A maximum of $35,000 can be rolled over from a 529 Plan to a beneficiary’s Roth IRA
  • Annual Roth IRA contribution limits apply to rollovers (in 2023, the limit is $6,500, which means it would take six years to convert $35,000 from a 529 Plan to a Roth IRA); annual rollover amounts cannot exceed the beneficiaries earned income as well
  • Conversions can only be made to a beneficiary’s Roth IRA; a parent saving with a 529 Plan in a child’s name cannot convert unused funds back into their own retirement account
  • Rollovers are not allowed until a 529 Plan account has been open for at least 15 years
  • Funds you convert from a 529 Plan to Roth IRAs must have been in the account for at least five years; contributions and earnings made within the last five years are not eligible for rollover

In the broadest sense, the new law will be most beneficial to those who opened a 529 Plan account long ago, have stopped making contributions, but still have unused funds in the account. If you or someone in your family is in this camp, you will definitely want to investigate this matter further and be prepared to take action in 2024.

Since the law is so new many of the details have yet to be defined. We recognize you may have more questions on this and we will continue to monitor developments. We expect the IRS and the primary 529 Plan custodians, like Fidelity and Vanguard, to issue more guidance on this as the year progresses. Fortunately, we have the rest of 2023 to get prepared. If you wish to take advantage of the new law, reach out to us at [email protected]. We can help the 529 Plan beneficiary in your family open and fund a Roth IRA.

Products and services offered by American Trust Company are not insured by the FDIC, are not a deposit or other obligation of, or guaranteed by, American Trust Company, and are subject to investment risks, including possible loss of the principal amount invested.

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