529 savings plans just got easier for parents

529 savings plans just got easier for parents

New legislation has solved a long-time dilemma for parents: What to do with unused funds in a 529 college savings plan.

SECURE 2.0 provides a solution for assets that will not be used for qualified expenses and remain in 529 plans. Beginning in 2024, a provision allows parents to roll over unused 529 assets into a Roth IRA, without taxes or penalty.

Many families start saving when children are young and can sometimes overfund a 529. Students may choose a less expensive school or finish their degree program early. If there are no other college-bound siblings to be named as beneficiaries, families may have to withdraw these unused funds and  face federal taxes and a 10% penalty for a non-qualified distribution.

Now parents have another option.

Here are the rules around the provision:

  • The total lifetime amount eligible for transfer from a 529 plan to a Roth IRA is $35,000 per beneficiary
  • The Roth IRA must be established in the name of the 529 beneficiary (the student)
  • Annual contribution limits apply to transfers. For 2023, the contribution limit for IRAs, including Roth IRAs, is $6,500
  • The 529 beneficiary receiving the transferred funds in a Roth IRA is subject to the same income requirement that applies to all IRA contributions.
  • However, income eligibility requirements that set limits for making Roth contributions do NOT apply. (For 2023, income phaseouts to make Roth IRA contributions begin at the modified adjusted gross income of $138,000 for single taxpayers, and $218,000 for married couples filing a joint tax return)
  • The 529 must be established for at least 15 years before you can transfer to a Roth
  • Contributions (and earnings) made in the 529 plan during the last five years are not eligible to be transferred to a Roth IRA. This is meant to deter someone from making a large contribution into an existing 529 plan and trying to transfer funds to a Roth IRA immediately to avoid contribution limits

More clarity needed

With any broad-based legislation, we expect to see additional guidance from the Treasury on certain provisions. One question raised already is whether changing the 529 beneficiary would trigger a reset of the 15-year clock requirement for transferring funds to a Roth IRA.

Another question is whether it is conceivable for the parent to change the 529 beneficiary to themselves to transfer the funds to a Roth in their name. Some may want to explore this if their reported income is too high for a regular Roth contribution.

While clarity is still needed, parents can assume with some confidence that they will be able to have a seamless rollover of the unused 529 funds to a Roth in their child’s name.

333754 5/23

More in: College Savings