For many families, the creation of Section 529 of the Internal Revenue Code in 1996—formally launching the 529 college savings program as we know it today—was a game changer. Suddenly, there was a tax-advantaged savings strategy to support parents and students in paying for the cost of a college education. Today, the College Savings Plans Network reports that there are more than 16 million accounts open totaling more than $411.2 billion.1
Today’s 529 Plans
From the start, 529 plans have allowed for tax-free accumulation and distributions to pay for college tuition and fees plus room and board. Over the years, Congress has added the flexibility to utilize 529 plans to also pay for apprenticeship programs, K-12 tuition of up to $10,000 annually, and student loan repayments of up to $10,000 in total.
The recently passed SECURE Act 2.0 adds a new enhancement beginning in 2024, which will allow for a rollover of 529 plan assets to a Roth IRA.2
Important rules around implementing a 529 plan rollover to a Roth IRA are summarized below:
- The 529 plan account must have been open for at least 15 years. It is not yet clear if a change in account beneficiary will reset the 15-year clock. Final regulations and rules are expected to address this question.
- The rollover can only be executed to a Roth IRA in the name of the 529 account beneficiary. The
rollover can’t be completed to a Roth IRA in the name of the 529 account owner.
- Contributions made to the 529 account within the prior five years are ineligible for a rollover.
- A maximum lifetime cap of $35,000 per beneficiary can be rolled from a 529 account to a Roth IRA.
- The annual amount that can be rolled from a 529 plan account to a Roth IRA is the lesser of the beneficiary’s earned income or the adjusted Roth IRA contribution limit. For example, the 2023 Roth IRA contribution limit is $6,500, which is subject to annual adjustment. The normal maximum income limitation does not apply for this purpose.
The new enhancement provides additional flexibility to address a common concern with 529 plans of what happens if there are excess funds in the account. It may also open the consideration of strategically over-funding a 529 plan account with the intention of establishing Roth retirement savings for children or grandchildren.
Please contact your CCM Advisor if you would like to learn more about how the 529 plan enhancement may impact your situation.
Sources for numbers and data cited throughout this summary can be found at:
NOTE: The information provided in this article is intended for clients of Carlson Capital Management. We recommend that individuals consult with a professional adviser familiar with their particular situation for advice concerning specific investment, accounting, tax, and legal matters before taking any action.