In December 2022, the SECURE 2.0 Act was enacted by Congress, ushering in notable modifications to retirement savings and student loans. Two pivotal provisions of this legislation are scheduled to be enforced in 2024, potentially exerting a considerable influence on your family’s financial outlook.
This blog elucidates the implications of the new law on your unused 529 college savings account and delves into its ramifications for your future savings.
You Can Now Roll 529 College Savings Into A Roth IRA
A 529 college fund is a tax-advantaged savings account crafted to assist families in saving for their children’s college education. The SECURE 2.0 Act has broadened the utility of these accounts by introducing a new rollover option, particularly beneficial when there’s surplus money after the beneficiary completes their education.
Commencing in 2024, beneficiaries of a 529 plan account will have the opportunity to roll over up to $35,000 from their 529 college savings plans into a Roth IRA, and the noteworthy aspect is that it’s exempt from taxes and penalties.
However, to capitalize on this enhancement to your retirement fund, there are certain rules you must adhere to:
01 | Annual and Lifetime Contribution Limits
Any rollover from your 529 account is bound by the annual Roth IRA contribution limits. To illustrate, if the Roth IRA contribution limit remains consistent in 2024 with the 2023 limit ($6,500 for individuals under 50), you can roll over an amount up to this limit, encompassing annual contributions deducted from your income. Additionally, there is a lifetime rollover contribution cap of $35,000.
02 | The 15-Year Rule
To be eligible for tax and penalty-free rollovers, the 529 plan needs to have been active for a minimum of 15 years. This countdown begins from the day the 529 plan was first established, typically by a parent or grandparent. It’s important to note that altering the beneficiary of the 529 plan at any time might potentially reset this 15-year timeframe.
03 | 5-Year Rollover Blackout
Funds contributed to your 529 plan within the five years preceding the rollover date are not eligible for rollover. Only contributions made beyond this five-year period qualify. However, you can progressively rollover funds over time as the 5-year window extends from the most recent contributions.
Consider this real-life example: Your mother initiated a 529 account for you in 2001, contributing annually for 20 years until 2020. Upon your college graduation in 2022, there remained funds in the 529 account that you wish to roll over into a Roth IRA on January 1, 2024.
Given the account’s minimum 15-year existence, you can rollover funds into a Roth IRA, up to the annual contribution limit of $6,500. Notably, the rollover, however, cannot include funds contributed within the last 5 years before the rollover date of January 1, 2024. Hence, contributions made between January 1, 2019, and January 1, 2024, are ineligible for rollover.
Now, let’s consider another scenario: Your father established a 529 college savings account for you in 1998, contributing annually until your trade school graduation in 2015. Since then, you and your employer have added $3,000 to your retirement account this year. With $10,000 remaining in the 529 account, you aim to roll over the funds into a Roth IRA on January 1, 2024.
In this case, the account’s existence surpasses 15 years, and all funds were contributed more than five years ago, making all funds eligible for rollover. However, due to the $6,500 annual contribution limit to retirement accounts, you can only roll over a maximum of $3,500 from your 529 into your Roth IRA this year, assuming no additional contributions to your retirement. After the rollover, the remaining $6,500 in your 529 account at the end of 2024 can be rolled over in 2025, provided no further contributions are made.
An Extra Bonus For Grandparent-Owned Accounts
To qualify for federal financial aid, students must provide their personal and family financial details on the Free Application for Federal Student Aid (FAFSA). Funds in a 529 account established by a parent are treated as a student’s financial asset in the FAFSA application.
However, if the 529 account is owned by a grandparent or another third party, it has traditionally not been considered as an asset for FAFSA purposes. Only withdrawals from the account were regarded as untaxed income for the student, impacting FAFSA eligibility.
The significant development is that, under the new SECURE 2.0 Act, withdrawals from a grandparent-owned 529 for education expenses will no longer be classified as untaxed income for the student. This change means that these funds will not negatively impact the student’s eligibility for federal aid.
Planning for What’s Really Important
To be eligible for federal financial aid, students must provide their personal and family financial information on the Free Application for Federal Student Aid (FAFSA). When a parent establishes a 529 account, the funds in it are considered as the student’s financial asset on the FAFSA application.
In contrast, if the 529 account is owned by a grandparent or another third party, it traditionally hasn’t been counted as an asset for FAFSA purposes. Previously, only withdrawals from this account were treated as untaxed income for the student, affecting their FAFSA eligibility.
The noteworthy update is that, with the enactment of the new SECURE 2.0 Act, withdrawals from a grandparent-owned 529 for educational expenses will no longer be categorized as untaxed income for the student. This modification ensures that these funds will not adversely impact the student’s eligibility for federal aid.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
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