Take Advantage of Excess 529 Plan Money with the Roth IRA Rollover Provision

Authored By Angelo Romano, CFP® | Senior Financial Advisor, SC&H Financial Advisors, Inc.

As a parent, guardian, or just someone who wants to see a loved one succeed, utilizing a 529 account to save for your child’s education expenses is a great investment strategy. This college savings plan offers a range of advantages including:

• Tax-deferred earnings
• Tax-free withdrawals if used to pay for qualified education expenses
• State tax deductions for contributions (not offered by all state plans – contact your financial planner for details)
• Customizable investments based on your child’s specific time horizon

Recommended Reading: 7 Proven Tips to Quickly and Efficiently Grow Your 529 College Savings Plan

529 accounts are designed specifically for education costs, and withdrawals for non-qualified expenses incur income tax and a 10% penalty on earnings. This can deter individuals from properly funding 529 plans for fear of being left with unused funds. Fortunately, starting in 2024, account holders will have an additional option to use leftover money in their 529 plan.

The SECURE Act 2.0 Rollover Advantage

In December 2022, the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 introduced new opportunities for account holders with leftover 529 funds. This legislation permits the direct transfer of unused 529 plan funds into a Roth IRA established in the beneficiary’s name, offering investors greater flexibility in utilizing their surplus savings.

Key details of the new 529 to Roth IRA rollover provision:

• The rollover provision begins in 2024
• The Roth IRA must be in the name of the beneficiary of the 529 plan
• The 529 plan must have been open for at least 15 years
• Contributions made to the 529 plan within the past five years cannot be rolled over
• The rollover is subject to the annual contribution limits for Roth IRAs, which is $6,500 for tax year 2023 (under age 50)
• The lifetime limit on the amount that can be rolled over is $35,000 and is shared by all beneficiaries of a 529 plan

Is the Roth IRA Rollover Provision Right for You?

The Roth IRA rollover provision can be a valuable tool to help families avoid paying taxes on investment earnings in an overfunded 529 plan, and can allow families to save for retirement in a tax-advantaged way. If you are considering a 529 to Roth IRA rollover but are unsure if it’s right for you and your family, contact one of our advisors to help you determine an appropriate strategy.

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Advisory Services offered through SC&H Financial Advisors, Inc., an investment adviser registered with the U.S. Securities and Exchange Commission. SC&H also offers advisory services through the doing business as name of SC&H Core. SC&H Financial Advisors, Inc. is a wholly owned subsidiary of SC&H Group, Inc.

The information presented is the opinion of SC&H Financial Advisors, Inc. and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance.