Joelle Spear summarizes how the SECURE Act 2.0 will enable rollovers from 529 College Savings Plans to Roth IRAs….(read more)

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SECURE 2.0 529 to Roth IRA Rollover: A Game-Changer for Education Savings

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0, introduced in March 2021, has several provisions that could reshape the landscape of retirement and education savings in the United States. One of the most notable changes is the expansion of qualified higher-education expenses (QHEE) for 529 plans and the introduction of a new rollover option for parents and grandparents who want to transfer unused 529 funds to Roth IRAs.

Under current law, 529 plan withdrawals for QHEE are tax-free at the federal level and in most states. However, QHEE has been limited to tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. The SECURE 2.0 bill proposes to broaden the definition of QHEE to include apprenticeship programs, homeschooling, student loan repayments, and up to $10,000 of qualified student loan interest.

This expansion could help families better navigate the rising costs of education and prepare for the changing landscape of work and skills development. However, the real game-changer is the new rollover option that allows parents and grandparents to transfer unused 529 funds to Roth IRAs without penalty. Here’s how it works:

– The rollover can be done once per lifetime for the same beneficiary or a family member.
– The rollover must be done within 60 days of the 529 plan distribution to avoid taxes and penalties.
– The rollover is limited to the amount of the QHEE that is not covered by other tax-free benefits, such as scholarships or grants.
– The rollover amount is subject to Roth IRA contribution limits, which are currently $6,000 per year for most taxpayers and $7,000 for those age 50 or older.

Why is this rollover option so valuable? For starters, it opens up a new avenue for tax-free growth and withdrawals for education savings beyond the 529 plan. Roth IRAs offer several advantages over 529 plans, such as no age restrictions on withdrawals, no required minimum distributions (RMDs), and more flexibility in how the funds can be used. With the expanded definition of QHEE, families can use Roth IRA funds to cover a wider range of expenses related to education and career development.

Another benefit of the rollover is the potential for generational wealth transfer. If a parent or grandparent has excess funds in a 529 plan that are not needed for education expenses, they can roll over the funds to a Roth IRA and continue to grow the funds tax-free for their beneficiaries, who can use the money for education or other purposes. Since Roth IRAs are not subject to RMDs during the owner’s lifetime, the funds can continue to compound tax-free for decades, providing a significant long-term benefit.

There are some caveats and potential downsides to consider with the SECURE 2.0 529 to Roth IRA rollover. For example, the tax implications can be complex, and families should consult with a financial advisor or tax professional before making any decisions. Additionally, the rollover could reduce eligibility for financial aid, since the Roth IRA balance counts as an asset on the FAFSA form. However, for families who are looking for more control, flexibility, and tax efficiency in their education savings strategy, the 529 to Roth IRA rollover could be a game-changer.