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 have taken effect in 2024, and they could substantially impact your family's financial future.

In this blog, we’ll 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 that is designed to help families save for their children's college education. With the SECURE 2.0 Act, Congress expanded the ways you can use these accounts by introducing a new rollover option, if the funds go unused and the beneficiary has money left over after their education is complete.

Starting in 2024, a 529 plan account beneficiary will have the opportunity to roll over up to $35,000 from a 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:

1 | Annual and Lifetime Contribution Limits

Any rollover from your 529 account is subject to the annual Roth IRA contribution limits. In 2024, for people under the age of 50, the Roth IRA contribution limit for individuals has been raised from $6,500 to $7,000. Therefore, starting in 2024, you can roll over funds up to this limit. Please keep in mind there is a lifetime contribution limit of $35,000 for 529 rollover amounts from all 529 plan accounts for each individual and that your total contributions to a Roth IRA cannot exceed $7,000 in any given year, which includes your personal or employer sponsored contributions.

2 | The 15-Year Rule

To qualify for tax and penalty-free rollovers, the 529 plan must have been open for at least 15 years. This 15-year clock starts ticking from the day the 529 plan was initially opened, usually by a parent or grandparent. It's still an unknown whether the IRS will restart the clock if a beneficiary of the 529 plan is changed at any point and whether this may potentially restart the 15-year clock, so it’s crucial to keep this in mind when considering if you are eligible for a rollover.

3 | 5-Year Rollover Blackout

Funds that were contributed to your 529 plan within five years of the rollover date cannot be rolled over. Only contributions made outside of this five-year window are eligible. Yet, you can continue to rollover funds as time goes on and wait out the clock on the 5-year rule.

Here's an example of how these rules work in real life application:

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, there were some funds left in the 529 account. You want to roll over these funds into a Roth IRA starting in January of 2024 to take advantage of the new rules. 

In this scenario, the account has been open for at least 15 years, so you can roll over funds into a Roth IRA, up to the annual contribution limit of $7,000 per year. Yet, you’ll need to check when the contributions were made to the 529 plan because you cannot include funds your mother contributed in the 5 years before your rollover date of January 31, 2024. Meaning any contributions made to the 529 account between January 31, 2019, and January 31, 2024 won’t be eligible. 

Let’s look at another example: Your father opened a 529 college savings account for you in 1998 and contributed money to it every year until your graduation from trade school in 2015. Since graduation, you and your employer have contributed a total of $3,000 to a Roth IRA account each year. There is $10,000 left in your 529 account and you want to roll over the funds into a Roth IRA on January 31, 2024.

In this example, the account has been open for more than 15 years and all of the funds in the account were contributed to it more than five years ago, so all of the funds are eligible for a rollover. However, you can only contribute up to $7,000 to a Roth IRA annually. Therefore, you can only roll over a maximum of $4,000 from your 529 account into your Roth IRA this year if you or your employer don’t make any more contributions in the calendar year of 2024. After the rollover of $4,000 and your employer sponsored contribution of $3,000, you’ll have an additional $7,000 in your 529 account at the end of 2024. You can then rinse and repeat this process each year until you’ve liquidated the remaining funds in your 529 account. 

Grandparent-Owned 529 Accounts Just Got More Valuable

In order to be considered for federal financial aid, students must disclose their personal and family financial information on the Free Application for Federal Student Aid (FASFA). Funds in a 529 account created by a parent are counted as a financial asset of the student on the FAFSA application.

There is a caveat for funds in a 529 account owned by a grandparent or other third party, as they have never been counted as an asset for FAFSA purposes. Money withdrawn from a 529 account is only untaxed income of the student when FAFSA considers it in its application review.

The big new development 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 income of the student, which means the funds will not hurt the student’s eligibility for federal aid. Under the prior rules, grandparent-owned 529 plans could have impacted a student’s eligibility for financial aid. However, due to the new rules for FAFSA and in their new simplified form, grandparent-owned accounts don’t need to be disclosed and won’t impact financial aid eligibility.

Planning for What’s Really Important

While you take steps to secure your financial future and maximize your families’ benefits under these new rules, don’t forget to protect everything you’ve worked so hard to build. Your retirement savings is likely the largest asset you own, and making sure it’s managed and passed on in the best way possible is essential for your well-being and the future well-being of your family. Minimizing taxes, maximizing opportunities and taking advantage of the laws available to you is important to the overall financial success of your family.

Roth IRA’s are extremely valuable for people later in life, as they let your money grow over a long period of time tax free. The federal government just provided the public with an amazing benefit to continue growing their retirement savings through one of the best retirement vehicles available and we should all be aware of these options and take advantage if this applies to you or anyone you know. It is always our goal to provide our clients and our community with the knowledge and expertise to capitalize on any options that can assist their Family, Wealth & Legacy, so we hope this article was informative and helpful in allowing you to do so for your family. If you enjoyed reading this article and made it to the end, please leave a comment and let us know your thoughts and your biggest takeaway. If you think your family and friends could benefit, please share it on social media to spread the word.

If you’re interested in going a bit deeper and learning more about creating a financial plan for your families’ future, give our office a call. We’d be honored to learn more about your goals for your family and share our unique process to ensure everything you own and everyone you love is provided for and protected, no matter what the future may hold.

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