The New 529 to Roth IRA Strategy Under SECURE Act 2.0
I recently wrote about some of the key changes under the new SECURE Act 2.0, which includes a provision to transfer unused 529 funds to a Roth IRA.
Beginning in 2024, some owners of a 529 will be able to make limited transfers tax-free to the beneficiary’s Roth IRA. There are many rules around who is eligible and how much of the funds can be transferred.
The Roth IRA owner must be the same as the 529 beneficiary.
The 529 must have been open for at least 15 years.
No contributions within the last 5 years are eligible to be transferred.
The transfer amount is limited to the annual Roth IRA contribution limit ($6,500 for 2023)
The maximum amount that can be transferred is $35,000 over their lifetime.
I think this is a great addition to the tax code as it allows parents to fund 529s with less fear of their child not using the money. If they don’t use it, eventually they will be able to move it to a Roth IRA and get started on their retirement savings. While some of the details are still being worked out, here is an example of how I understand this could work.
Example - Jack and Jill open a 529 in 2015 for their son, Jack Jr. They contribute $40,000 over the years and it grows to $100,000 by the time Jack Jr goes to college in 2025. He used $70,000 while in college and when he graduates in 2029, there is $30,000 remaining. Beginning in 2030, 15 years after the account was opened, they can begin transferring up to $6,000 per year (the annual Roth IRA contribution limit) into a Roth IRA for Jack Jr. By the end of 2034, they have successfully transferred the remaining unused 529 into a Roth IRA for him.
While there may be opportunities for advanced planning techniques, such as purposely overfunding a 529 or opening a 529 for yourself if ineligible for direct Roth contributions, I would advise waiting for further clarity before implementing such strategies.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.