College student in your household? Consider this . . .
The SECURE Act 2.0 created a provision to allow people to rollover unused funds from a 529 college savings account to a Roth IRA.Starting in 2024, beneficiaries of 529 college savings accounts are permitted to do a tax-free rollover to a Roth IRA.
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Prior to this provision, if 529 funds were not used for educational purposes, earnings withdrawn were subject to income tax and a 10% penalty.
There are some rules and limitations:
- The 529 account must have been open for at least 15 years. No word from the IRS if the 15-year period resets if the beneficiary is changed.
- The rollover cannot include any contributions made in the last 5 years.
- The total amount rolled over cannot exceed the annual IRA contribution limit ($6,500 for 2023 and $7,000 for 2024). The annual amount eligible for rollover is reduced by any actual traditional or Roth IRA contributions made for that year.
- There is a lifetime limit of $35,000 per beneficiary on rollovers, but this can be maxed out for multiple beneficiaries if they each have a 529 account.
In 2024, you can potentially double up by making a rollover for both 2023 and 2024, but only if the 2023 rollover is completed by April 15th, 2024. While the law did not specify this strategy, the IRS has stated in the instructions for Forms 1099-R and 5498 “A distribution made after December 31, 2023, and before April 15, 2024, that is rolled over to a Roth IRA by April 15, 2024, and designated for 2023 would be reported as a Roth IRA contributionfor 2023.”1f you have questions about this strategy,529 Plans, Roth IRAs or other wealth planningstrategies, please reach out to schedule a time to talk.
*Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing. Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan. Some IRAs have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.