By Natalie Hayes Schmook, MBA, CFP, CVA, Hayes Wealth Advisors
Q: What is this 529 plan rollover?
A: At the start of 2023, the Secure 2.0 Act came out with a dizzying number of changes (90 to be exact). With Social Security set to run out in 2037, it’s not surprising that this legislation inches toward getting Americans to save more for their own retirements. The bill itself is 4,100 pages long, but one topic that keeps coming up is the ability to roll 529 plan funds into a Roth IRA.
Starting in 2024, unused 529 funds can now be rolled up into a Roth IRA in the beneficiary’s name (up to a lifetime max of $35,000). This is great if your kid receives a scholarship or has money left over when they graduate. Remember Roth account distributions are not taxed as income so a 529 plan in many states means converting pre-state tax and tax deferred funds into tax free forever funds.
AVAILABLE TO EVERYONE?
When I saw this, I immediately wanted to know if every client could open a 529 plan for themselves for $35,000 then roll it into a Roth. Not so fast. This rule is for parents who funded 529s for their kids. Funds must have been in the account for at least 15 years, and you can’t roll contributions from the past five years.
Rollovers are also subject to Roth contribution limits, so it would take someone under 50 years old six years to fully roll over the $35,000 ($35,000 divided by the $6,500 annual limit). I can only infer that this interferes with the ability to do Roth and backdoor Roth contributions.
In a nutshell: this is a nice add on for extra 529 funds, but it isn’t something that can easily be taken advantage of.
Disclaimer: This material is for educational and informational purposes only to the best of the author’s knowledge and is not to be construed as personalized financial or investment advice. Consult a financial professional about your personal situation.
Email your questions for Money Talk to mbijlefeld@jobson.com.
Natalie Hayes Schmook, MBA, Certified Financial Planner™, Certified Valuation Analyst™, is the founder and owner of Hayes Wealth Advisors, a financial planning and investment management service for practice owners and their families.
graduation photo credit: Chuck Savage, Getty Images
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Investing 201: Types of Investment Vehicles
Investing 101: Understanding Stocks Through Positioning
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