In today’s vlog, I will be discussing the SECURE Act 2.0: 529 Plan rollovers to Roth IRAs. Before I elaborate about it, we shared our vlog about the changes regarding Required Minimum Distribution (RMD) last month. You can check it out for more information on RMD. This is our second vlog about the changes within the SECURE Act 2.0 which became a law in December 2022. For this vlog, I will focus on the 529 Plan rollover to a Roth IRA.
This change will start next year, 2024. Beneficiaries of 529 plans may roll over up to $35,000 to a Roth IRA during their lifetime. The Roth IRA receiving the funds must be in the name of beneficiary of the 529 plan for this to work. The rollovers from 529 plans to Roth IRAs will be subject to annual contributions limits. For example, it would be up to $6,500 for this year, 2023, but the change is effective in 2024. I just wanted to give you an example if it could happen this year. The income limitations on Roth IRA contributions will not apply to this change. However, the beneficiary must have compensation during the year at least equal to the amount being rolled over. Before you consider this strategy, there are two more rules to be aware of. One rule is the 529 plan must have been open for more than 15 years before the beneficiary can roll over to a Roth IRA. Another rule is any contributions to the 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA.
Also, it is important to acknowledge that the SECURE Act 2.0 does not address the issue of successor 529 beneficiaries or a change in the beneficiary at this time. What does that mean? For example, if a beneficiary has been rolling over $15,000 from their 529 plan, the account owner decides to change the beneficiary to a different person. Would the different person be able to contribute up to $35,000 to a Roth IRA? Or is the lifetime amount rule applying to the 529 plan account itself, not beneficiaries? Will a new 15-year waiting period starts when the beneficiary is changed? Hopefully, IRS will provide a guidance with the answers in future.
Ultimately, this strategy can benefit those who have a 529 plan that will not be used for education expenses and to avoid tax penalty by doing a tax-free rollover to Roth IRA. If this change could impact your situation, you can contact our advisors on how to plan to utilize this strategy if there are unused funds within your 529 plan.