A significant benefit has come to fruition on December 29, 2022. President Biden signed the “Consolidated Appropriations Act of 2023”, which included the “SECURE 2.0 Act of 2022”. Well, now, starting from January 1, 2024, any remaining funds in a 529 account can be shifted tax-free to a Roth IRA.
This change means it’s time to rethink how we see 529 accounts. They’re not just for college savings anymore; they’re versatile tools for tax-advantaged investing, covering both education and retirement.
Per Chris Stack, Managing Consultant for SavingForCollege.com, here are the key points:
- 1. The 529 account must have been maintained for a minimum of 15 years, with the same owner, same designated beneficiary (“DB”) and likely in the same 529 plan*. Owners of 529 accounts should no longer be looking to close older 529 accounts but rather considering whether such accounts should be kept open to benefit from this 15-year requirement.
- The amount being transferred (including the earnings attributed thereto) must have been contributed at least 5 years prior to the transfer. There is no prohibition to such 529 account continuing to be funded even after the first transfer to the Roth IRA, so it is possible that amounts not originally eligible may be so transferred in a later year.
- The 529 Account is a source for Roth IRA funding subject to the annual limit (currently $6,500 for <50 years) and must be net of any other contributions such year. This is distinguished from the conversion of a traditional IRA to a Roth IRA which may be done at once with the full balance of the traditional IRA but with the payment of taxes at the time of such conversion.
- The amount so transferred is limited to an aggregate $35,000. It is unclear if such aggregate limit applies to each such account or is applicable to each DB*.
- The Roth IRA must be that of the 529 account’s original DB only*. The 529 account owner has always had the option of changing the designated beneficiary to any other qualifying family member as often as they wish but that is likely to re-start the 15- time required period.
- The transfer to the Roth IRA must be a trustee-to-trustee transfer similar to a rollover between 529 plans with the earnings history following the account. Indirect transfers where the account owner takes a distribution to re-invest within 60 days does not qualify for the transfer to the Roth IRA.
- The income limits applicable to a Roth IRA are not applicable to transfers from the 529 account.
- The 529 account owner remains in control and decides the timing and application of funds in their account, including whether to so transfer funds to the DB’s Roth IRA.”
This change opens up new possibilities for 529 plans, adding to their existing benefits like tax-free growth, protection from creditors, and estate planning advantages. Keep in mind, though, that state tax laws might differ from federal ones, so it’s wise to stay updated on any state-specific regulations.
Please note this is for informational purposes only and is not intended as tax, legal or investment advice. The topics covered may undergo changes in law and interpretation without prior notice. Additionally, as per IRS Circular 230, it’s important to note that any U.S. tax advice provided in this communication is not intended for the purpose of evading U.S. tax penalties and should not be relied upon as such. Lastly, be sure to consult with your tax professional on any item outlined in this article.
*- The Act empowers the U.S. Treasury (IRS) to address related matters in notices, regulations etc.