Secure Act 2.0 – Changes that Enhance 529 Plans
Fifth in a series of articles addressing key components of the SECURE 2.0 Act, which became law on Dec. 29, 2022
By Christopher Wolff
The SECURE 2.0 Act includes major retirement plan changes designed to strengthen the financial readiness of Americans to retire. The changes resulting from the SECURE 2.0 Act will be phased in, with some beginning in 2023 and most becoming effective in 2024 and beyond.
This article focuses on changes the SECURE 2.0 legislation made to 529 plans to encourage more saving for education.
Reduced Overfunding Risk
529 plans have long served as effective education savings tools, allowing parents, relatives and others to set aside money tax free for a child’s education expenses. Concerns about potential penalties and tax implications have sometimes deterred individuals from maximizing these plans. Because earnings from non-qualified withdrawals (those not used to pay for qualified education expenses) are subject to a 10% penalty and may also be subject to federal income taxes, some parents delayed savings, others under saved and still others chose not to use a 529 plan at all to save.
Beginning in January 2024, however, the SECURE 2.0 Act allows a portion of 529 plan funds to be used for Roth IRA contributions. By allowing the transfer of excess funds to a Roth IRA, parents can now mitigate the risk of overfunding and redirect surplus savings.
Conditions for Transfer
It is important to note that certain conditions must be met for the transfer of funds from a 529 plan to a Roth IRA. These conditions include:
- Matching beneficiary names. The Roth IRA must be opened in the same name as the beneficiary of the 529 plan. This ensures alignment between the two accounts and streamlines the process of transferring funds.
- Minimum 15-year maintenance. The 529 plan must be maintained for at least 15 years before the transfer can occur. This requirement encourages long-term planning and discourages short-term speculation.
- Exclusion of recent contributions. Contributions made within the past five years, along with associated earnings, are ineligible for transfer to a Roth IRA. This safeguard ensures that recent contributions remain dedicated to education expenses.
- Contribution limits and eligibility. The annual maximum limit for Roth IRA contributions still applies. In addition, the beneficiary must be eligible to make contributions to a Roth IRA (i.e., they earn income), and the contributions must not exceed the beneficiary’s income for the year. To prevent excessive transfers, the lifetime contributions from the 529 plan to the Roth IRA are capped at $35,000.
In summary, the SECURE 2.0 Act addresses concerns about overfunding 529 plans and offers a flexible way to expedite savings for eligible beneficiaries. Because the funds can be transferred to a Roth IRA, parents can optimize education savings strategies for their children and maximize tax advantages.
Given the specific criteria for using 529 plans in this way, discuss with your Country Club Wealth Advisor how to best navigate the details.
Some information provided herein may be obtained from outside sources believed to be reliable, but no representation is made as to its accuracy or completeness. This information is intended for discussion purposes only and should not be considered a recommendation. The information contained herein does not constitute legal, tax or investment advice by Country Club Trust Company. For legal, tax or investment advice, the services of a competent professional person or professional organization should be sought. Trust services and investments are not FDIC insured, are not guaranteed by the Trust Company or any Trust Company affiliate, and may lose value. Past performance is no guarantee of future results.