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The 529 plan has some new perks for investors. His SECURE 2.0 Act of 2022, included in the Consolidated Budget Act of 2023 (PL 117-328), includes several new benefits for 529 plan investors that ABLE accounts should know is needed.
The most “headline-grabbing” change from Secure Act 2.0 was the ability to roll over up to $35,000 from a 529 plan to an IRA. This is a change he will take effect in 2024. This is a powerful savings and investment tool for 529 plans for education and now possible retirement.
Here’s what you need to know about rolling over from a 529 plan to an IRA.
Rollover from 529 Plan to Roth IRA
Beginning in 2024, families will be able to roll over money from 529 Plans to Roth IRAs owned by 529 Plan beneficiaries.
You cannot roll over money to a Roth IRA owned by the owner of the 529 Plan account or someone else. Of course, you can change the beneficiary of your 529 plan and have the money rolled over to the new beneficiary, his Roth IRA.
rollover limit
There is a lifetime limit of $35,000 per beneficiary.this Limit per personnot per 529 plan, so the limit applies regardless of the number of 529 plans.
However, up to $35,000 per Beneficiary can be carried over to multiple Beneficiaries. Also, nothing prevents you from changing beneficiaries of a 529 plan, but there are limits per beneficiary.
529 Plans must have been in existence for at least 15 years. Rollovers are only available to funds that have been in the 529 plan for at least five years.
Rollover must be by trustee-to-trustee transfer.
Combined 529 Plan and Roth IRA Contribution Limits
The Roth IRA contribution limit (annual dollar limit) still applies. As such, rollovers from 529 plans to Roth IRAs are limited. This includes the Roth IRA annual contribution limit minus all other contributions made during the year to IRAs owned by the beneficiary.
Given the conflict between the lifetime limit of $35,000 and the annual contribution limit, it may take several years for the remaining money to roll over on the 529 plan.
Roth IRA rollovers are waived of the Roth IRA income limit.
The rollover contribution and revenue from the 529 plan is proportional and this carries over to the Roth IRA. As such, the contribution portion of the rollover can be returned tax-free. rear Appears in the Roth IRA.
Things to watch out for
Many tout it as a great new way for families to save money for their children’s education. and
retirement.
However, there is one big “gotcha” to watch out for.
In other words, every state sets its own rules for distributions covered by the 529 plans. Some states may not consider a rollover from a 529 plan to an IRA an eligible distribution.
In this case, rolling over funds may result in taxes and penalties on the rolled over amount. Some states consider a rollover to a 529 plan to be ineligible if it’s a rollover to a 529 plan outside the state, so the fact that it’s a rollover doesn’t help.
Before you rush into doing this, make sure your state complies with federal regulations. Some states comply immediately, while others (especially California) choose not to.
Find your state in the 529 Plan Guide or click your state on the map below.
Who Should Consider This Option?
The Roth IRA Rollover is a useful tool for those with money left over on their 529 plan. It also said some investors are concerned about the trade-off between college and retirement savings (or potentially addressing penalties for overpaying for 529 plans). Concerns are also eliminated.
Advance
There are some details in the law that the IRS needs to clarify. For example, rollover is limited to his contributions as of five years prior to the date of distribution, plus any profits attributable to the contributions.
It is unclear whether this refers to earnings five years prior to the distribution date or to earnings afterward. Legal language is also difficult to parse because it contains double negations.
The new policy applies to all eligible tuition programs, including 529 plans and prepaid tuition plans, but does not apply to Coverdell Education Savings Accounts.
don’t forget to check out Student Loan and Financial Aid Programs by State Find more ways to save on tuition.