The SECURE 2.0 Act of 2022 introduces a noteworthy change: a special rule allowing transfers from 529 plans to Roth IRAs. Effective in 2024, this rule enables unused college savings to shift to retirement accounts tax- and penalty-free.

Why This Matters

Before this change, if a 529 plan wasn’t fully used for education, options were limited:

• Changing the beneficiary within the family – maybe a younger sibling
• Using up to $10,000 to pay off qualified loans
• Pay taxes and a 10% penalty on earning of non-qualified withdrawals.

Overfunding a 529 plan was not a great option. Many only funded a 529 plan for the amount they felt would be used and invested additional funds elsewhere. Which means possibly losing any available state tax deduction.  In Alabama, donors are allowed a $5000 deduction ($10,000 married filing jointly) for 529 plan contributions.  This can be used for one beneficiary or divided among several. You may contribute additional amounts which are nondeductible. The new 529-to-Roth transfer alleviates fears of unintended taxation, encouraging families to invest early for tax-free growth on college savings. However, there are a few restrictions:

Limitations

1. Lifetime maximum transfer is $35,000.
2. The 529 account must be at least 15 years old.
3. No contributions or earnings from the last five years can be transferred.
4. Transfers are subject to annual Roth IRA contribution limits.

A Practical Example

Jack’s 529 plan was established by his parents in 2001. They stopped funding the account in 2017 – so nothing in the last five years. Jack still had $29,000 in the 529 account upon his graduation in 2023. In 2024, Jack is working and has sufficient income to make the maximum Roth IRA contribution of $6,500.  He can continue these transfers up to $35,000 or until the 529 account is exhausted.

Strategic Uses

Apart from retirement, Roth IRAs can be used for other strategic purposes, like buying a first home.

Please contact your Dent Moses advisor for additional information.