As individuals, we strive to secure our children's education while also preparing for our own retirement. In recent years, legislative changes such as the SECURE Act 2.0 have created new ways for tax-efficient wealth accumulation, specifically at the intersection of 529 plans and Roth IRAs. This article will delve into the nuances of these two powerful savings plans in relationship to SECURE Act 2.0 so that individuals can unlock strategic opportunities to invest in both education and retirement.

First and foremost, lets refresh on the intricacies of 529 plans and Roth IRA’s.

529 Plans: A 529 plan is a tax-advantaged savings account designed specifically for education expenses. It allows individuals to contribute funds that can grow tax-free and be withdrawn tax-free when used for qualified education expenses such as tuition, books, and room and board at eligible institutions. One of the key benefits of a 529 plan is its tax advantages, including potential state tax deductions for contributions and tax-free growth and withdrawals for qualified expenses.

Roth IRAs: A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement. Unlike traditional IRAs, contributions to a Roth IRA are made with after-tax dollars, meaning that withdrawals in retirement, including earnings, are not subject to federal income tax. Roth IRAs also offer flexibility, allowing contributions to be withdrawn at any time without penalty and no required minimum distributions (RMDs) during the account holder's lifetime.

Now that we have refreshed on these two plans let’s talk about how the SECURE Act 2.0 changed the relationship between these two savings vehicles. Before SECURE Act 2.0, to transfer money tax-free from a 529 plan, the earnings portion of the withdrawal must be used for qualified education expenses. Non-qualified withdrawals may be subject to federal income tax and a 10% penalty tax on the earnings portion. Now, SECURE Act 2.0 allows funds from an established 529 account to be transferred tax-free to a Roth IRA for the beneficiary of the 529 account.

The makers of this law saw this adjustment as an opportunity for account holders to help their beneficiaries get ahead in their retirement savings after finishing college while simultaneously lifting the burden of taxes and a 10% penalty that previously applied to the transfer of any unused funds in a 529 plan.

The reason this is important today is because the IRS has stated that distributions rolled over between Dec. 31st of 2023 and April 15th of 2024 can be counted as a 2023 Roth IRA contribution which means that two rollovers are possible for a single beneficiary in the 2024 calendar year.

Key Considerations:

• The 529 account must have been open for at least 15 years.

• The beneficiary of the 529 account and the Roth IRA must be the same person.

• Annual rollovers are subject to applicable Roth IRA contribution limits, and rollover amounts may not exceed $35,000.

Opportunities and Caution: This adjustment presents an opportunity for account holders to help their beneficiaries save for retirement after finishing college while avoiding taxes and penalties. However, it's important to consider that once funds are converted to a Roth IRA, they cannot be undone. It may be a wiser decision to just keep the funds in the 529 plan since funds can be used for another beneficiary, continuing to grow tax-free.

In conclusion, the ability to transfer funds from a 529 plan to a Roth IRA tax-free offers a strategic way to leverage education savings for retirement planning. At Provident Financial Planning, we're here to help you navigate these opportunities and make informed decisions that align with your financial goals and aspirations. We’re committed to guiding you every step of the way. Schedule a Zoom appointment or visit our Southlake, Plano, Dallas, Houston, or Atlanta offices. Our team, consisting of professionals and an in-house tax team with expertise in JD, CPA, and CFP®, is ready to offer comprehensive guidance.

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