Introduction to SECURE 2.0 and Its Impact on Saving for Retirement

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the subsequent SECURE 2.0 Act of 2022, part of the Consolidated Appropriations Act, 2023, introduced significant reforms aimed at bolstering Americans' retirement savings. Among these reforms, a notable provision allows for a new way for young adults to use 529 plans to save for retirement.

Understanding the 529-to-Roth IRA Rollover Under SECURE 2.0

The SECURE 2.0 Act of 2022 introduces the ability for individuals to transfer unused funds from a 529 college savings plan to a Roth IRA without incurring taxes or penalties, up to certain limits. This provision creates a valuable opportunity for beneficiaries who find themselves with excess funds after completing their education.

Exploring the Basics of 529 Plans

A 529 plan is a tax-advantaged savings plan designed primarily for future educational expenses. Contributions to these plans grow tax-free, and withdrawals for qualified educational expenses, such as tuition, required books, and even student loans up to $10,000, are also tax-free. However, withdrawals for non-qualified expenses can incur taxes and a 10% penalty.

What to Do With Unused 529 Plan Funds

Often, 529 plan contributions exceed the actual costs of education, especially when beneficiaries earn scholarships. Previously, options for handling leftover funds were limited. Now, SECURE 2.0 offers the option to roll these funds into a Roth IRA, providing an ongoing tax-advantaged investment growth opportunity aimed at retirement.

Roth IRA: A Brief Overview

A Roth IRA is an individual retirement account where after-tax money can grow tax-free. Withdrawals made after age 59½ are tax-free, provided the account has been open for at least five years. Early withdrawals may also be tax-free under certain conditions.

Key Limitations of the 529-to-Roth IRA Rollover

While the rollover option adds flexibility, it comes with restrictions:

• A lifetime limit of $35,000 can be transferred.
• The 529 plan must have been established for at least 15 years.
• Contributions to the 529 made within the last five years cannot be rolled over.
• Annual Roth IRA contribution limits apply.
• Rollovers must be conducted directly between plans (plan-to-plan or trustee-to-trustee).
• The beneficiary must have earned income in the year of the rollover.

Navigating State Tax Implications

It's important to consult a tax professional to understand potential state tax consequences, as state definitions of qualified educational expenses may vary.

Is a 529-to-Roth IRA Rollover Right for You or Your Child?

This new rollover option under SECURE 2.0 offers a strategic opportunity to use leftover 529 funds effectively. Rather than transferring the savings to another beneficiary's 529 plan or incurring penalties and taxes on non-educational withdrawals, these funds can now potentially augment your or your child's retirement savings.

Conclusion: Planning for the Future with SECURE 2.0

If you're considering how a 529 plan can fit into your broader financial strategy, or if you have leftover funds in a 529 plan, exploring a rollover to a Roth IRA might be a prudent step. Contact our office today to discuss how these changes could benefit your family's financial future.