(February 17, 2023) - Recently, the federal government enacted SECURE 2.0 of 2022, which delivers dozens of retirement-related provisions. Among them is the ability to make tax- and penalty-free rollovers from your 529 plan into a Roth IRA. This new benefit will go into effect on January 1, 2024, and we anticipate that you will be able to take advantage of it with your WA529 GET or DreamAhead account.
This enhancement may ease some people’s concern about saving in a 529 account because of uncertainty over what to do with unused funds if their student receives a scholarship or decides not to pursue higher education. Now, this new provision may allow you to take those unused funds and give your student a head start on their future retirement.
However, before you act, take a moment to learn about the requirements that must be met in order to roll over unused 529 funds. (Note that these are the requirements as we understand them today based on the language in the legislation and are not reflective of official and final guidance provided by the U.S. Treasury; as always, you should consult with your tax, investment, and legal advisors about your personal circumstances.)
- The 529 account must be open for the beneficiary for 15 years.
- The Roth IRA receiving rollover funds must be in the name of the beneficiary of the 529 plan. That means account owners can’t roll unused funds originally intended for their student’s education into their own Roth IRA.
- Contributions made to your 529 plan within the last 5 years (and the earnings on those contributions) are not eligible to be moved to a Roth IRA.
- The annual limit for how much can be moved from a 529 plan to a Roth IRA is limited by the IRA contribution limit for the year, including all funds contributed from outside the plan.
- You may only roll over a lifetime maximum of $35,000 from a 529 to a Roth IRA per beneficiary.
Another benefit: transfers from 529 plans to Roth IRAs will not be subject to the current Modified Adjusted Gross Income (MAGI) limitations.
Of course, even before the Roth IRA rollover becomes a reality in 2024, you have many options in the event your student doesn’t use all of their GET or DreamAhead funds. You can keep the money in the account in case your student decides to continue their education in the future. You can change the beneficiary on the account to another family member. You can even hold on to the account and use the funds for your future grandchildren’s education. In the event these options don’t work for you, you can always take a non-qualified withdrawal that includes any earnings you have accumulated to date.
Keep in mind that non-qualified withdrawals are subject to federal taxes and penalties. Before electing to take a non-qualified withdrawal, WA529 recommends you first consider ways in which you can use your funds for qualified purposes and talk with a financial advisor or tax professional to determine your best option.
Forbes: 529 Plans Just Became More Flexible
The Motley Fool: How Your Unused 529 Plan Funds Can Become Part of Your Retirement Plan
John Hancock: Five Things to Know About Rolling a 529 Account Into a Roth IRA