The Secure Act of 2022 eases worries about over-funding a 529
Do you have unused 529 plan funds? Are you worried about possibly over-funding your child’s 529 plan should they end up receiving a scholarship/financial aid or decide not to attend college? Often, these concerns prevent parents and or grandparents from fully funding their child or grandchild’s 529 plan account as any withdrawals not used for qualified educational purposes can be subject to a 10% penalty. However, the recently passed Secure Act of 2022 should ease some of these worries as the Act allows for a beneficiary’s unused 529 funds to be rolled over into a ROTH IRA beginning in 2024.
Rules for rolling 529 funds into a ROTH IRA
Using a ROTH IRA, 529 plan beneficiaries can continue to allow the funds to grow tax free for years to come – a great planning strategy for retirement and/or growing assets for future generations. However, there are certain rules and limitations that must be followed for the transfer to be a qualified rollover:
- The 529 account must have been open for more than 15 years
- No contributions or earnings on contributions from the last five years can be transferred to the ROTH IRA
- Transfers are subject to annual ROTH IRA contribution limits (income limits do not apply). The annual contribution has yet to be determined for 2024, but for 2023, the limit totaled $6,500, with an extra $1,000 catch up contribution for those aged 50 or older. The contribution limit is indexed for inflation annually so the 2024 amount could increase.
- Beneficiaries may roll over a maximum of $35,000 over their lifetime.
- Finally, the beneficiary must qualify to make a ROTH IRA contribution in the year the transfer is made, meaning they must have earned income. The beneficiary can only rollover that amount for which there is earned income. For example, if the beneficiary earned $4,000 in wages during 2024, only $4,000 of the 529 plan assets could be transferred to the ROTH IRA. If the beneficiary earned $50,000 in wages during 2024, they could rollover the maximum amount of $6,500.
What other options do families have for unused 529 funds?
If there are still unused 529 plan funds after completing the lifetime maximum rollover of $35,000, you still have a few options as to how to deplete the funds without incurring taxes and/or penalties.
- The plan can be rolled over to another “family member”. A “member of the family” of a student is a person related to that student as follows: (a) a son or daughter, or a descendant of either; (b) a stepson or stepdaughter; (c) a brother, sister, stepbrother or stepsister; (d) the father or mother, or an ancestor of either; (e) a stepfather or stepmother; (f) a son or daughter of a brother or sister; (g) a brother or sister of the father or mother; (h) a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law; (i) the spouse of the beneficiary or of any of the other foregoing individuals; or (j) a first cousin of the beneficiary. For this purpose, a child includes a legally adopted child, and a brother or sister includes a half-brother or half-sister.
- Up to $10,000 in 529 plan funds can be used to pay off qualified student loans.
- The beneficiary can keep their account to be rolled over for the benefit of future children (original beneficiary can keep the plan open for up to 30 years after date of high school graduation).
- Keep in mind that 529 plans can not only be used for undergraduate studies, but for graduate school as well.
With so many options for using 529 plan assets, paying taxes and/or penalties to get the funds out of the plan should be a last resort. Please contact your Keiter Opportunity Advisor if you have any questions or want to discuss your tax situation in more detail.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.