Impacts of SECURE 2.0 on 529 Education Accounts and Roth IRA’s

Mar 30, 2023 | Tax

Officially passed in December 2022, the Setting Every Community Up for Retirement Enhancement Act (SECURE) 2.0 Bill brought a host of potentially impactful government retirement policies and updates. From increasing the age of Required Minimum Distributions to allowing employer contributions to student loan payments, the possible benefits of the SECURE 2.0 act are plentiful. We won’t bore you with each change brought about by the new bill, but we want to inform you of how one might take advantage of a new opportunity regarding 529 Educational Savings Accounts and IRA accounts.

How Your child’s IRA Could Be Impacted

Prior to SECURE 2.0, any investments made to 529 Education Savings plans were essentially stuck in the “education-related expenses” spending lane. The list of qualified expenses is limited to categories like tuition, room and board, books & other classroom supplies, et cetera. Any withdrawal or distribution made from the account towards an unqualified expense was subject to income tax, with a 10% federal fee on top of that: Ouch! Even roll-over options were limited to other highly restricted accounts like 529 ABLE accounts. However, with the new bill, Roth IRA accounts are now eligible roll-over options (if you navigate the various qualifiers). However, you will have to wait until 2024 before you can start exploring these new financial opportunities. If you want to learn more about what SECURE 2.0 could do for you and how you or your child’s Roth IRA could benefit from this change, read on!

Roll-Over Restrictions

Before you get too excited at the prospect of a “backdoor” approach to boost your IRA account, keep in mind that Congress imposed stringent qualifications for these rollovers. Their intentions seem to be geared towards reducing the risks for would-be 529 account investors, rather than creating a new route to bypass taxes.

Listed Beneficiary Limitations

In order to make any 529-Roth IRA transfers, you will need to line up your account beneficiaries. Per the new regulations, funds from a  529 account must be transferred to an IRA that has the same beneficiary listed. You can’t take funds from a 529 that has your child listed as the beneficiary and put them into your own Roth IRA. If your son, Sam Jenkins, is the listed 529 beneficiary, then funds can only go to a Roth IRA with Sam Jenkins as the beneficiary. Some financial advisors speculate that there may be a way around this, but the bill is too new to conclusively say. There may be future legislation that prohibits the changing of beneficiaries after an account is created, but no one can say for sure whether something like that would pass.

Time Constraints

Two major regulations of this opportunity will require patience and time for any investors that haven’t already had an account open for a substantial time. To be eligible to transfer funds to the beneficiary’s IRA, the 529 must have been opened for at least 15 years before any funds can be rolled over.  Additionally, only funds that have aged in the 529 for at least 5 years are qualified to be transferred to a Roth IRA. These two regulations alone impose a huge time factor that may require present action to realize future benefits. So if you would like to take advantage of this recent policy change, and you haven’t established a 529 for the intended beneficiary, there really is no better time than now.

Contribution Restrictions

Lastly, you need to know how much money and in what increments you can make transfers. In line with the 2023 contribution limit to Roth IRA accounts, 529 rollovers cannot exceed the $6,500 yearly contribution limit imposed on Roth accounts. This example from an article on a finance website illustrates this:

“Example 3: Helena is the beneficiary of a 529 plan account that has excess funds she will not need for school, and the account has been open for more than 15 years.

In 2024, Helena contributes $4,000 of her own earned income to a Roth IRA. As such, assuming the IRA contribution limit for 2024 remains at the $6,500 limit for 2023, the owner of Helena’s 529 plan could transfer up to another $6,500 – $4,000 = $2,500 into her Roth IRA for the year.”

Along with the yearly contribution cap, there is an aggregate, or total, contribution limit of $35,000 per Roth IRA for each 529 account. So, in other words, one could only transfer $35,000 from their 529 account to a corresponding IRA account. If a 529 account had the funds available to do this, the account holder could transfer $6,500 to the desired IRA once per year, for six years, until that $35,000 limit is reached (if this was done on January 1st of 2024, no other contributions could be made to the Roth IRA until January 1, 2025, per the yearly contribution limit).

Planning for the Future

As this topic of 529 and IRA planning demonstrates, there can be a lot of complexity and necessary planning when it comes to preparing for the future. All of the laws, statutes, rules, regulations, and policies can become complicated even without the unexpected ups and downs of life. ProvenLaw, PLLC specializes in helping our clients prepare for the future by providing qualified, expert, and specialized estate planning tailored to individuals’ and families’ financial needs. If you would like to learn more about how you can plan for the future, please don’t hesitate to schedule an appointment through our website or call to speak with our receptionist to schedule a consultation.

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