The SECURE Act 2.0, signed into law on December 2022 as an update to the original SECURE Act of 2019, introduces several important changes to retirement and savings laws in the United States. One of its notable provisions is designed to provide more flexibility for college savings accounts, particularly 529 Plans. Specifically, this second iteration of the Act allows for increased optionality with how to optimize unused 529 funds – bringing rollovers to Roth IRAs into the equation.

Background on 529 Plans

A 529 Plan is a tax-advantaged savings plan designed to encourage saving for future education costs. Funds in a 529 Plan grow tax-free and can be withdrawn tax-free when used for qualified educational expenses.

New Provision: Excess 529 Plan Savings

The SECURE Act 2.0 introduces a new provision allowing families to transfer excess 529 Plan savings into a Roth IRA. This change aims to address the common concern that 529 Plans may accumulate more funds than needed for educational expenses, potentially leading to tax implications if the money is not used for its intended purpose.

Key Features of the New Provision:

1. Transfer of Excess Funds: Under the new provision, if there are excess funds in a 529 Plan after the beneficiary has completed their education, those funds can be rolled over into a Roth IRA. This allows families to avoid the penalty and tax consequences that would otherwise apply to non-qualified withdrawals.

2. Limits on Transfers: There are limits to how much can be transferred. Specifically, the amount transferred cannot exceed the Roth IRA contribution limits for the year. Additionally, the total amount that can be rolled over is subject to a lifetime cap per beneficiary, which is typically set at $35,000.

3. Time Constraints: The 529 Plan must have been open for at least 15 years before any funds can be rolled over into a Roth IRA. This ensures that the funds are not part of a recent 529 Plan contribution that would otherwise have been subject to penalties.

4. Beneficiary Conditions: The Roth IRA rollover can only be done for the beneficiary of the 529 Plan or their siblings. This means that the funds can be redirected to the
educational or retirement savings of the same family but not to unrelated
individuals.

5. Impact on Roth IRA Contribution Limits: The rollover amounts do not count against the annual Roth IRA contribution limits. This means the rolled-over amount is an additional benefit rather than a subtraction from the yearly contribution limit.

Benefits of the Provision

• Flexibility: This provision adds flexibility for families who might have over-saved for education and want to ensure their excess funds continue to grow tax-free.
• Tax Efficiency: It provides a tax-efficient way to handle surplus 529 Plan funds without incurring penalties or taxes.
• Encouragement to Save: Knowing that excess funds can be redirected to a Roth IRA may encourage more families to save for education with the peace-of-mind that funds can be utilized in a retirement account if needed.

Conclusion

In summary, the SECURE Act 2.0’s provision on transferring excess 529 Plan savings to a Roth IRA represents a significant shift in how education savings can be managed. It offers families a more flexible and tax-efficient way to handle surplus educational funds, thereby enhancing the overall utility of 529 Plans.