Exploring the New 529 Plan Rollover Option to Roth IRAs

The SECURE Act of 2022, popularly known as SECURE 2.0, introduced several significant changes to tax-advantaged savings plans. Among these changes, a new provision effective in 2024 allows certain assets in 529 higher education savings plans to be rolled over into Roth IRAs. This provision provides a new avenue for maximizing the benefits of 529 plans while preparing for retirement. Here’s a closer look at what this option entails and how you might take advantage of it.

What is the New 529 to Roth IRA Rollover Option?

Starting in 2024, designated beneficiaries of 529 plans can roll over up to $35,000 in total lifetime assets into their own Roth IRA. This change introduces a new way to use leftover funds in 529 plans, offering a retirement savings opportunity if educational expenses are lower than anticipated.

However, there are several restrictions and conditions:

1. Lifetime Limit: The maximum amount that can be rolled over from a 529 plan to a Roth IRA is $35,000 over the beneficiary's lifetime.
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2. Annual Limit: The rollover amount in any given year is subject to the annual IRA contribution limit, which is $7,000 for 2024 for those under 50 years old.
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3. Earned Income Requirement: The beneficiary must have earned income equal to or greater than the amount being rolled over.
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4. Plan Age Requirement: The 529 plan must have been in existence for at least 15 years.
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5. Asset Age Requirement: The assets to be rolled over must have been in the 529 account for at least five years.

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Impact on Regular IRA Contributions

One critical point to note is that the amount rolled over from a 529 plan to a Roth IRA will reduce the amount you can contribute to your IRA that year on a dollar-for-dollar basis. For instance, if you roll over $5,000, your allowable IRA contribution for that year is reduced by $5,000.

Future Guidance

Additional guidance from the IRS is expected to further clarify the implementation details and reporting requirements.

Conclusion

The new rollover option from 529 plans to Roth IRAs introduces an innovative way to repurpose educational savings for retirement planning. You can effectively leverage this provision to optimize your savings strategy by understanding the limitations and requirements. However, consulting with your financial advisor or tax professional is crucial to ensure this strategy aligns with your specific retirement goals and to comply with all relevant regulations.