Are you saving for college? Forbes’ recent article titled “529 Plans Just Became More Flexible: Here's Everything You Need To Know” explains that the Secure Act 2.0 changed 529 savings plans, which will make the funds easier to use when college expenses aren't as high as planned. In addition, the law allows families to roll over up to $35,000 from a 529 plan to an IRA. However, the changes do not become permanent until 2024.
After 15 years in the plan, unused funds up to $35,000 can be rolled into a Roth IRA to save for retirement, subject to the annual IRA contribution limit. There's also no penalty for using this money for IRA contributions instead of college expenses. Previously, a 10% penalty would have applied to the growth if funds were withdrawn for non-qualifying expenses.
There’s a 15-year waiting period, which might affect the benefit many people can get from this change. Therefore, you cannot open a 529 plan now, fund it and start moving money immediately. You have to wait at least 15 years.
The money transferred to an IRA goes to the account’s beneficiary or the student, not the account owner.
529 plan rules are created on the state level for each plan. Therefore, while federal law now allows529 plansto roll over to IRAs, your state may not conform to these rules. Currently, the 529 to IRA rollover is considered a “rollover” for tax purposes, and most states consider outbound rollovers taxable events. Therefore, states will need to update their state tax laws to conform with this new federal rule. Check your state’s law as well before you proceed with a rollover.
If you use up all the money for college, that's super. However, if you don’t, you can transfer some money to your beneficiary's IRA based on annual limits, until you reach the $35,000 cap. This is good news for families worried about saving too much money and like the idea of funneling that cash into their child's retirement accounts instead.
Book a call with Vick Law, P.C. today to discuss how a 529 plan may fit into your estate plan.
Reference: Forbes (Feb. 20, 2023) “529 Plans Just Became More Flexible: Here's Everything You Need To Know”