By Jackie Emert, CPA, MST, Tax Manager and Amy Sandlin, CPA, Tax Senior Manager at Blue & Co.

Have you heard about the SECURE Act 2.0? It builds on the original SECURE Act of 2019, which was intended to make it easier for Americans to save for retirement. The SECURE Act 2.0 further enhanced these provisions, providing dozens of additional retirement planning opportunities. One of the new provisions, effective January 1, 2024, allows you to move some (not all) of unused §529 Plan assets to Roth IRA.

How Does a §529 Plan Work? 

A “qualified tuition program” (“QTP” OR “529 Plans”) provides valuable tax benefits while providing for your child or other beneficiary’s education.

First, the 529 Plan account is established for a “designated beneficiary” – this is most often a child (but it does not have to be a child). Then, the account is funded with after-tax dollars.

The 529 account accumulates earnings over time that are not taxed while they are held in the plan account. When the money is withdrawn from the 529 Plan, the contributions are not tax again. The accrued earnings are not taxed either if they are used for qualified education expenses.

This §529 tax-savings strategy is similar to a Roth IRA, except it is intended to be used for education costs instead of retirement.

How Did SECURE 2.0 Change §529 Plans?

Complexity arises if your child (or other beneficiary) does not use all the funds held in the 529 account. Any withdrawal of earnings from the 529 Plan not used for qualified education expenses are taxed and penalized.

However, with the passage of the new SECURE Act 2.0, some of the unused funds can be rolled over to a Roth IRA, avoiding taxes and the 10 percent tax penalty.

This can be a significant tax savings, as well as a good way to start saving for your loved one’s future.

The rollover to the Roth IRA is tax-free to them and will continue to grow tax-free if they keep it invested. Additionally, you can contribute regardless of your income!

As with anything in the tax code, there are complex underlying rules to this strategy. Let’s map them out:

• As of 2024, your Section 529 Plan must be open for 15 years to be eligible for a tax-free rollover.
• Lifetime Limit – you can contribute up to $35,000 of unused §529 funds to a Roth IRA for the beneficiary of the account.
• The rollover counts toward the annual Roth contribution limit – this is the total amount that can be contributed by anyone into the Roth IRA. For 2023, that limit is $6,500.
• The individual must be designated beneficiary of the 529 Plan and move funds to a Roth IRA in their name.
• The beneficiary must have earned income, and the amount of 529 funds that can be converted to the Roth IRA cannot exceed the amount of earned income.
• Contributions or earnings made within the past five years cannot be rolled over

Further guidance from the IRS on the actual implementation of the provisions is still pending. If you need any assistance with Section 529 Plans, steps to convert to a Roth IRA for your beneficiary, or would like more information, please reach out to your Blue & Co. advisor today.