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529 Plans Just Got Better

529 Plans Just Got Better

| February 15, 2023

I don’t usually compliment the government when they make changes to existing investment and tax law. And I do so now begrudgingly. But I got to call it like I see it. The Secure Act 2.0 just sweetened the deal for 529 plans.

As a refresher, the 529 Plan is a way to invest monies for your child’s education. The after tax funds are invested and distributions are not taxed if spent on qualified educational expenses for the beneficiary of the plan. A nice feature is that while you are the Trustee (the adult) and your child is the beneficiary, anyone can contribute. There are limits to the amount per year, but instead of cash at Christmas your crazy aunt can put money towards Sally Sue’s college fund.

The Secure Act of 2019 made private elementary school eligible for 529 distributions. Which was nice. But the question I always get asked is, what if we have money left over when our child graduates from Harvard? At first, you may find this to be overly optimistic if not downright delusional considering the inflation of higher education tuition, but it’s a good question.

Think about it. If you’re reading this blog, I assume you have a very high IQ. Given that, your progeny will most likey inherited the genius gene and get quite a bit of scholarship. Or perhaps, like Bill Gates, Kanye West or Mark Zuckerberg, you’ll simply drop out because you’ve got to hurry up an change the world. Also, what if college or university simply isn’t a necessity in 20 years when your newborn child will use these funds. Perhaps robots will be baristas and we will no longer need Art History majors to perform that vital function.

The Secure Act 2.0 has come to rescue you. Starting in 2024 and beyond, if you have money left over in your 529 plan those funds can be rolled over into a Roth IRA for your 529 beneficiary with no tax consequences. Now there are a few “catches”:

  • Up to $35,000 can be rolled over from a 529 plan to a beneficiary's Roth IRA
  • Annual Roth IRA contribution limits apply to rollovers (in 2023, the limit is $6,500, which means it would take six years to convert $35,000 from a 529 plan to a Roth IRA)
  • Conversions can only be made to a beneficiary's Roth IRA; a parent saving with a 529 plan in a child's name cannot shift unused funds back into their own retirement account
  • Rollovers are not allowed until a 529 account has been open for a minimum of 15 years
  • Funds converted from 529 plans to Roth IRAs must have been in the account for at least five years.

The question I don’t have an answer to is what if I, a grown man, make myself the beneficiary of a 529 plan. I contribute, spend a few bucks on conversational Spanish at the local community college, wait 15 years and then roll the funds into my adult Roth IRA? Seems like a loophole that I will get back to you on. Wink, wink. If you’d like to discuss 529 plans in a post Secure Act 2.0 world, click here.