The Secure Act 2.0 has substantially modified 529 savings plans, offering increased adaptability to families who find that their college expenses are not as high as initially planned. One of the primary changes under the new legislation is the ability to roll over a maximum of $35,000 from a 529 plan to an Individual Retirement Account (IRA), providing an alternative way to utilize unused education funds. In this article, we will delve into the crucial aspects of these changes, discuss their potential impact on your financial planning, and highlight essential considerations. However, it is crucial to remember that these provisions are set to become permanent only in 2024, which is an important factor when making decisions based on the new rules.
Under the new rules, after 15 years in a 529 plan, unused funds up to $35,000 can be rolled into a Roth IRA to save for retirement, subject to the annual IRA contribution limit. This offers a significant advantage, as there is no penalty for using this money for IRA contributions instead of college expenses. Previously, a 10% penalty would have applied to the growth if funds were withdrawn for non-qualifying expenses.
The 15-year waiting period is crucial to the new 529 plan provisions. It means you cannot open a 529 plan now, fund it, and start moving money immediately – you must wait at least 15 years. This waiting period may affect the benefit many people can derive from these changes.
The money transferred to an IRA goes to the account's beneficiary or the student, not the account owner. This ensures that the funds continue to benefit the intended recipient, even if not used for college expenses.
It is essential to remember that 529 plan rules originate at the state level for each plan. While federal law now allows 529 plans to roll over to IRAs, your state may not conform to these rules. Most states currently consider outbound rollovers to be taxable events. As a result, states must update their tax laws to conform with this new federal rule. It is crucial to check your state's law before proceeding with a rollover.
If you use all the money in your 529 plan for college expenses, that's great. However, if you don't, you can transfer some money to your beneficiary's IRA based on annual limits until you reach the $35,000 cap. This is a welcome change for families concerned about over-saving for college and preferring to funnel that extra cash into their child's retirement account instead.
The Secure Act 2.0 brings welcome changes to 529 plans, offering families increased flexibility in using their college savings. Rolling over unused funds to an IRA without penalties is particularly beneficial, allowing families to repurpose those savings for retirement. As always, it is essential to consult with a financial professional and stay informed about your state's specific rules and regulations before making any significant financial decisions.
Reference: Forbes (Feb. 20, 2023) “529 Plans Just Became More Flexible: Here's Everything You Need To Know”
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