Starting in 2024, there will be a major change to 529 plans that allow for a new transfer option to Roth IRAs. The new provision is part of the SECURE 2.0 Act, passed by Congress in late 2022.
The new 529 to Roth IRA option is great news for many retirees and their children (or grandchildren). It provides more flexibility for what to do with unused 529 funds, offers huge tax savings, and can even boost your retirement plan.
Read on for key details of the upcoming changes to 529 plans.
About 529s
529 college savings plans are a staple for families who want to save for their child or grandchild’s education. These accounts have always come with compelling tax benefits:
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Individual contributions up to $17,000 per year ($34,000 per married couple) are not counted as gifts, therefore they aren’t taxable
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Earnings grow tax-deferred up to the 529 plan's maximum contribution limit
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In 2023, you can front-load a 529 plan (giving 5 years' worth of annual gifts of up to $17,000 in a single contribution, for a total of $85,000 per person, per beneficiary) without incurring a gift tax
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Some states offer tax deductions or tax credits on in-state plans (no federal deductions)
Despite these tax breaks, there’s always been one major downside—withdrawals used for anything other than educational expenses come with a penalty.
More Options for Kids to Save for Their Future and for Americans to Save For Retirement
Thanks to the updated rules, families will be able to convert leftover 529 funds into retirement savings via a Roth IRA, without incurring the penalty for non-educational withdrawals. But of course, there are some very specific rules to follow:
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The 529 account must be open for at least 15 years before you can do the 529-to-Roth IRA rollover
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The 529 plan beneficiary must also be the owner of the Roth IRA
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You can convert up to $10,000 per year of unused funds to a Roth IRA, with a lifetime maximum of $35,000
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Rollovers are subject to normal annual contribution limits for Roth IRAs
This new ability to convert unused balances to Roth IRAs lets retirees (and retirement savers) contribute more to their nest eggs each year. You can even overfund your 529 plan as a tax-advantaged way to boost your retirement savings.
Converting Your 529 to a Roth IRA Under the New Rule
If you don’t already have a 529 plan for your child or grandchild, it often makes the most sense to choose from one of your state's 529 programs. Be sure to compare available tax credits, investment options, and fees before choosing a program.
If you have an existing plan, here’s an example of how it might work: Let’s say you have a grandchild who is in their last year of college, and the parents are funding the education costs out of pocket. You could still contribute $35,000 to a 529 plan, and let it sit there growing tax-free for the next 15 years. Then transfer those funds to a Roth IRA. By the time the grandchild reaches age 59 ½ (when they could access the funds), that account would have grown to over $200,000! Pretty cool, if you ask us.
If you invested $35,000 when a student graduates college, here’s what it would be worth based on the historical performance of a 100% stock portfolio:
|
Age |
Ending Balance |
Total Tax-Free Growth |
|
21 |
$35,000 |
$0 |
|
30 |
$82,500 |
$47,500 |
|
40 |
$215,000 |
$180,000 |
|
50 |
$555,0000 |
$520,000 |
|
60 |
$1,440,000 |
$1,405,000 |
|
70 |
$3,735,000 |
$3,700,000 |
Here’s another example: If you contributed $35,000 over the years and your child only used $15,000 for college, you could convert $10,000 of the remaining $20,000 balance to a Roth IRA. Then, the $10,000 converted amount could grow tax-free for your retirement.
If you’re a parent or grandparent and you have the means to do so, we highly recommend using this strategy, for two major reasons:
- You’re setting up your child to be wealthy and have options
- It’s one of the smartest—and simplest—tax strategy moves you can make
How Tax Strategy Fits Into Your Larger Financial Plan
Over time, consistently converting unused 529 balances and maximizing your Roth IRA contributions can really add up. Talk to your financial advisor about how converting a 529 to a Roth IRA might fit into your broader retirement and tax strategy.
Since retirement accounts make up a large part of most retirees’ income, paying the least amount of tax is key to making the most of your savings. A financial advisor, such as a Certified Financial Planner (CFP®), can help you assess your financial plan for tax savings opportunities. This might include diversification between tax-deferred, tax-free, and taxable accounts and planning your withdrawal order. Or, using tax-loss harvesting to offset gains. Even your estate plan can be a source of unwanted taxes if you’re not careful.
No matter what, your financial plan should be the result of a holistic assessment including your overall goals, wants, needs, and financial situation. Learn more about our approach to financial planning here, or contact an advisor at Wealth Legacy Institute today.
Disclosure: For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are unmanaged baskets of securities and are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. Wealth Legacy Institute is not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. The opinions expressed by featured authors are their own and may not accurately reflect those of Wealth Legacy Institute®
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