Starting January 1, 2024, the SECURE Act 2.0 has made it possible to roll over over-funded 529 plans to a Roth IRA to help save for retirement.
Most parents are concerned that they won’t be able to save enough money to pay for their children’s college education. However, what happens to the 529 plan if your child doesn’t attend college, receives a scholarship, or finds another way to pay for college? Unless the beneficiary of the 529 plan is changed to another student, any money distributed from the 529 plan will be subject to tax (tax on the earnings, not on the principal) and a 10% penalty for not using the money for qualified educational expenses. This is not an ideal situation.
Congress has attempted to soften the financial impact of having money left in your 529 plan. The SECURE Act 2.0 will allow you to move unused funds to a Roth IRA to help save for retirement. This new provision does come with the following limitations.
- A lifetime limit of $35,000 can be rolled over to the retirement account.
- The 529 plan must have been open for at least 15 years.
- Any money contributed to the plan in the last five years is not eligible.
- The beneficiary of the 529 plan must be the beneficiary of the IRA.
- You can’t move the entire $35,000 in one year. You’re restricted to the annual IRA contribution limits; for 2023, this limit is $6,500 if you’re under age 50. If you’re 50 or older, the limit is $7,500.
- The account beneficiary must have “earned” income to be able to make the rollover. Earned income is W-2 wages or self-employment income.
- All rollovers must be direct rollovers, custodian to custodian.
- Normally, taxpayers who file jointly are excluded from contributing to a Roth IRA if their income exceeds $214,000. This limitation does not apply to rollovers from 529 plans.
- These new rules don’t apply to ESAs (Educational Savings Accounts). It’s unclear if the IRS will allow you to transfer the funds to a 529 plan and then to a Roth IRA.
I’m sure over the next few months, the IRS will come out with updates and clarifications on this provision of the Secure Act 2.0.
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About Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS-licensed Enrolled Agent and a Certified Tax Resolution Specialist who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA. This includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, and West Chester. We also service clients in Delaware, New Jersey, New York, and throughout the United States.
Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
