SECURE Act 2.0: 529 plans to Roth IRAs, tax-free rollovers now allowed
The Secure Action 2.0 $1.7 trillion federal spending package is heading to the President’s desk for signature
Starting in 2024, a provision is included in the new legislation that allows tax-free rollovers of money in 529 plans to Roth IRAs accounts
529 plans have been the vehicle of choice for college savings since 1996, they provide tax-free growth and aren’t taxable if the funds are used for tuition, room and board, books, fees, etc.
Normally, funds can only be withdrawn for qualified education expenses. Withdrawing funds for non-qualified reasons has traditionally triggered taxable income and a 10% penalty on the investment earnings
Whitener Capital’s initial thoughts:
This change removes the concern, ‘what if my child doesn’t go to college?’
There is no longer an issue of overfunding the account
The ability to fund a Roth IRA for young adults is an outstanding way to begin retirement savings
Limitations:
There is a $35,000 lifetime cap on transfers
Rollovers are subject to the annual Roth IRA contribution limit ($6,500 in 2023)
The rollover can only be made the beneficiary of the account (not the owner or parent)
The 529 account must have been open for 15 years
Earnings and contributions made in last 5 years cannot be rolled over