Latest 529 Plan Legislation

You may have heard the good news about 529 Plan rollovers—families can now make a rollover from a 529 Plan to a Roth IRA tax-free starting in 2024. There historically have been taxes and penalties for withdrawing from a 529 Plan early or for non-education expenses.

529 Plans have always been a great option for educational expenses as they grow tax-free and are not taxable when used for qualifying education expenses. The new rule allows beneficiaries of the 529 plan to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to a Roth IRA in their name.

A quick anecdote - one of the concerns of parents I speak with is overfunding a 529 plan and their child receives a scholarship or financial aid.  In my experience, most plans are underfunded, but I understand the concern.  If there are excess funds in the plan, the parents that responsibly saved are now taxed at ordinary income rates (rather than reduced capital gains rates) and are penalized at 10%.  There was certainly a conflict there, and I am happy Congress has addressed it.

There is some fine print to note:

1. There is a lifetime cap of $35K for total 529 plan transfers to Roth IRAs. But, hey, that’s more than before!
2. The annual Roth IRA contribution limit of $6,500 (up from $6,000) still applies, and the beneficiary must also be the account holder. For example, a 529 typically exists as an account under the parent with their child listed as the beneficiary; the 529 rollover would only be allowable to the child’s Roth IRA, not the parent’s.
3. Lastly, the 529 account must be open for 15 years and contributions/earnings in the account must sit for greater than five years before rolling over.

This will be something we continue to monitor for you and discuss in your financial planning meetings as applicable. As always, let us know if you have any questions.