In a previous article, we discussed Alabama’s CollegCounts 529 Fund and how the recently passed Secure Act 2.0 offers greater flexibility to account owners in allocating education funds. Let’s now focus on a recent change that allows a portion of unused 529 account assets to be rolled over to a Roth IRA for account beneficiaries. Several conditions must be met to take advantage of this new provision. Here are a few things you should know:
529 to Roth IRA Planning Opportunity
- The opportunity takes effect in 2024;
- The transfer must be made to the Roth IRA of the account beneficiary;
- The 529 account must be opened for 15 years or longer before the transfer can occur;
- Last 5 years of contributions, and earnings on those contributions, are ineligible for transfer;
- Subject to normal annual contribution limits (i.e., $6,500 for those under age 50; $7,500 for those over age 50), less other IRA and Roth contributions * Note: Earned income for the beneficiary is required. *
- Transfers NOT subject to the normal Roth IRA income eligibility limits. These limits are currently $138,000-153,000 Modified Adjusted Gross Income (MAGI) for single filers and $218,000-228,000 MAGI for married couples filing jointly.)
- Maximum lifetime transfer is $35,000 per beneficiary.
Planning Implications
The new 529 Plan to Roth IRA opportunity has a few implications: The first, and perhaps the most obvious, is the importance of opening 529 Plan accounts as early as possible for beneficiaries. By opening accounts early, savers start the clock on the restrictions mentioned in items #3 and #4 above and allow for greater flexibility in how the funds are used long term. Second, and perhaps less obvious, is the possibility to jump start retirement savings for a beneficiary. Let’s review this strategy further.
A family can heavily fund a beneficiary/child’s 529 plan account early in life. If they are confident all educational expenses will be covered, they can begin the 529 plan to Roth IRA transfer process as early as age 16. While this strategy requires earned income (See NOTE in #5 above and think part-time and summer jobs for the beneficiaries here) if a beneficiary can: 1) Transfer the current annual contribution limit of $6,500 until the $35,000 limit is reached and, 2) The Roth IRA experiences a reasonable rate of return of 7%, they could have a Roth IRA of approximately $900,000 at age 65! Wow!
While the above is a great strategy, make sure to consult your financial planner to ensure it makes sense for your situation.
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Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.
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