Effective Jan. 1, 2024, investors with unused dollars in certain 529 college-savings plans can roll their remaining balances into tax-free Roth IRAs for the benefit of their plans’ named beneficiaries without risk of penalties or income-tax exposure. Moreover, investments in Roth IRAs may continue to grow free of tax for beneficiaries to withdraw in retirement tax-free.
Congress enacted these new 529 saving-plan rules at the end of 2022 under the Secure Act 2.0, which, among other things, also raises the age of required minimum distributions (RMDs) from IRA and 401(k) plans, reduces the penalty for failure to take an RMD, and eliminates early withdrawal penalties under certain circumstances. Under existing law, contributions you make today to 529 saving plans grow tax-deferred until beneficiary children reach college age. At that point, plan withdraws are tax-free when used to pay for children’s qualifying higher education expenses, including tuition, books, computers and room and board. Families may also withdraw up to $10,000 per year to pay for children’s primary and secondary school education at a religious or private school.
However, prior to the passage of the Secure Act 2.0, any funds remaining in a 529 saving plan that could not be used for qualifying education expenses were subject to ordinary income tax and a 10 percent penalty upon withdrawal. This can happen when children either do not go to college, they attend a college that costs less than expected, or they receive scholarship funds to pay a portion of their higher education costs.
With the Secure Act 2.0, families with unallocated 529 savings can roll up to $35,000 into a Roth IRA for 529 plan beneficiaries without penalties or tax implications while also giving their children a head start in retirement savings. Such rollovers are not subject to the usual income limits of Roth IRA contributions, which for 2023, applies to individuals with income under $138,000 (or $218,000 for married couples filing joint tax returns.) To qualifying for the 529 plan rollover, the following criteria must be met:
Consider that once children gain employment, they are likely to have access to an employers’ retirement savings plans, for which they can contribute up to $22,500 in 2023 and yield tax-deferred savings while also qualifying for a potential employee match. Throughout the children’s careers, they may continue to max out their 401(k) savings and eventually convert those plans into Roth IRAs (and pay any related taxes at the time of conversion) to enjoy tax-free withdrawals in retirement.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors, an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with Raymond James Financial Services. He can be reached in the firm’s Boca Raton, Fla., office at (561) 361-2001 or via email at info@provwealth.com.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Brendan T. Hayes is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC.
 Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors + CPAs. PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
 This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the advisors of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information contained in this report has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Please note, changes in tax laws may occur at any time and could have a substantial impact on each person’s situation. While we are familiar with the tax provisions presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
 This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
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Posted on April 4, 2023