Many people are now aware of the SECURE Act which was passed at the end of 2019 and which changed the way that 401(k)s and IRAs pay out to beneficiaries. SECURE was later expanded in 2022 to further encourage retirement savings.
One of the measures passed in SECURE 2.0, as it is popularly known, relates to 529 education plans.
Parents often open 529 plans when their children are small, to provide for a child’s future education. They are essentially guessing what might be needed much later. But if the child does not use up the amount saved, then parents are looking at conundrum: either leave that money in the 529 plan for future generations (and their uncertainties), or withdraw the excess funds and be subject to a 10% tax penalty because they were not used on qualified educational expenses.
With SECURE 2.0, parents who have overfunded a 529 plan have a more palatable solution: up to $35,000 from the 529 may be rolled into a Roth IRA for the child, without paying taxes or penalties. The rollovers are still subject to the Roth annual contribution limits, so it is possible there will need to be a series of annual rollovers to empty the 529 account. However, normal income limitations on Roth IRA contributions do not apply to the rollovers.
In order to qualify, the 529 account must have been open for more than 15 years. And the child must have earnings at least equal to the rolled-over amount. So this truly is a solution for otherwise “trapped” funds.
This perk is allowed beginning in 2024. As a parent, it is a relief those excess education funds are not lost, and can be put to good use by seeding a retirement account for your child. What an amazing gift!
Attorney Kendra Rey is an attorney at Hammerle Finley Law Firm, a boutique law firm offering services in estate planning, probate, guardianship, business law, litigation, and real estate. Contact her at (972) 436-9300. This article does not constitute as legal advice.
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