SECURE Act 2.0 allows rollovers of 529 funds to Roth IRA - Butler Financial, LTD
Quarterly Coordinates: Time Is On Our Side - April 17, 2023


SECURE Act 2.0 allows rollovers of 529 funds to Roth IRA

Effective in 2024, beneficiaries of 529 college savings accounts may transfer unused funds directly to a Roth IRA. The industry is still striving to clarify certain specifics, but we do know the general requirements.

This is an innovative planning opportunity for families that overfunded 529 accounts for certain beneficiaries or who may now choose to intentionally do so to take advantage of this benefit.

Of course, there are rules that must be followed. The Roth IRA must be in the name of the beneficiary and the 529 plan has to be established for a set period of time, perhaps as long as 15 years. The lifetime amount that can be transferred is $35,000 and subject to the annual contribution limits. This means the rollover would need to be done over several years, and the Roth contribution for each year will reduce the amount that can be transferred from the 529.


A statement from the United States Senate Committee on Finance regarding the rationale behind this new law:

“Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a nonqualified withdrawal and assume a penalty. This has led to hesitating, delaying or declining to fund 529s to levels needed to pay for the rising costs of education. Families who sacrifice and save in 529 accounts should not be punished with a tax and penalty years later if the beneficiary has found an alternative way to pay for their education.”

Beneficiaries doing the rollovers must have earnings equal to or greater than the rollover amount. Any Roth IRA or traditional IRA contributions made by 529 beneficiaries would count against the $6,500 annual limit. Rollover amounts can’t include any 529 contributions or earned income on those contributions made in the preceding five-year period.

It’s also important to note that income limitations on Roth IRA contributions do not apply to these rollovers. 529 contributions and earnings go into a Roth IRA in like kind (no gain or loss is recognized). It appears there are no income limits or income levels at which your contribution to your Roth would be reduced or eliminated completely when making a 529-to-Roth transfer, which is a benefit when compared to a Roth IRA.

All in all, this new law helps alleviate your concern about overfunding a 529 college savings account because it gives you the option to reposition the unused funds to a tax-advantaged Roth IRA.

This material is general in nature and provided for informational purposes only. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds and protection from creditors. The tax implications can vary significantly from state to state. Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

Other posts you might like
A predictable pullback in equity markets

Markets & Investing September 27, 2023 Raymond James CIO Larry Adam discusses why we were due for the...

read more
Where do Treasury yields go from here?

Economy & Policy September 26, 2023 Raymond James Senior Investment Strategist Tracey Manzi discusses...

read more
Remote work and its effect on real estate

Technology & Innovation A pandemic necessity. But, how have remote preferences and hybrid workstyles...

read more