April 15th is just around the corner, and you know what that means… Tax Day is coming! While it seems that most of us don’t exactly look forward to Tax Day, it’s not all bad news. In fact, with SECURE Act 2.0, many changes were made that could benefit US taxpayers. I wanted to focus on one specific change that might benefit owners of 529 college savings plans.
So, what is this change and how could it benefit you?
The SECURE Act 2.0, adopted in 2022, allows a limited amount of unused funds in 529 college savings plans to be rolled over to a Roth IRA starting this year.
Under the law, up to $6,500 can be transferred this way in a given year, with a total lifetime limit of $35,000, per beneficiary!
Now, there are some serious caveats that make this definitely something you need to study out before taking the plunge.
The 529 must have been open for 15 years and rollovers cannot include any contributions made within the last 5 years – so you can’t open up a 529 plan, contribute to it this year, and then roll it over to a Roth IRA right away.
The beneficiary and the Roth IRA owner must be the same person – so if you have a 529 plan for a child, and want to roll it over to your Roth IRA, you’d have to change the beneficiary on the 529 plan first.
And that brings up another issue. The IRS hasn’t clarified whether or not changing beneficiaries restarts the 15-year clock.
Additionally, the beneficiary and Roth IRA owner must have enough earned income to contribute to a Roth IRA.
And finally (or maybe not – the IRS and states could still provide further guidelines this year), any rollovers from a 529 plan to a Roth IRA also count towards the annual IRA contribution limit.
So, who could this benefit and how?
Let’s say you have a 529 plan for a child who has already graduated and didn’t’ use up all of their 529 savings. They’ve moved on and now have a job and are making a little bit of money. Establishing a Roth IRA and rolling over funds from that 529 plan is a good way to get them started saving for retirement. Remember, the rollover would count towards the child’s annual IRA contribution limit, but if they aren’t contributing to a traditional IRA, rolling over the 529 to a Roth IRA could be a good way to get started.
Now, if you have other individuals that you could name as beneficiaries of the 529 plan, it may be in your best interest to simply change the beneficiary and not roll over the funds to a Roth IR. It would continue to grow tax-free, and they could use those funds (which now are no longer limited to just college) – it all depends on your specific situation.
Now remember, I’m not a tax professional, so if you think this could be something that may benefit you, your first step is to talk with a tax advisor or accountant. If you decide it is something you’d like to do, we can talk and make it happen. It could be a great way to help someone save for retirement with a Roth IRA.
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