New and Noteworthy Changes Coming to 529 Plans

529 Plans are education savings accounts that have been evolving since their creation more than twenty-five years ago. The enactment of the Economic Growth and Tax Relief Reconciliation Act on June 7, 2001, made changes that completely exempted the earnings of Section 529 plans from federal taxation, creating the accounts we know today.

Experts from all sides of the financial world have encouraged parents to save using these vehicles for their children’s futures to take advantage of the tax benefits, powers of compound interest, and having dedicated sources for future tuition. However, the most common argument against starting a 529 college savings plan for young children is often the relative uncertainty surrounding whether the child will even attend college, and what the college tuition landscape will look like by the time they do.

The recent SECURE 2.0 Act passed at the conclusion of last year (December 2022) addresses this concern and seeks to create additional options for 529 funds that broaden their use for the child who will grow up to use them. The special rule included in the Act will now allow distributions from 529 plans to Roth IRAs, which are another great savings vehicle for the future. This rule provides for unused college savings to be transferred to a Roth IRA retirement account without incurring any taxes or penalties.

Prior to this rule being introduced, the options for unused 529 funds were often limited. The beneficiary of the account could be changed to a different family member, or the funds could be withdrawn, which would result in earnings being taxable (included in your gross income) and subject to a 10% penalty. These limitations have deterred would-be savers who may then opt for less tax-efficient investments instead.

The option to shift extra 529 funds to a Roth IRA starting in 2024 is exciting, and now allows for a way to save money in a 529 plan without fear of incurring taxes or penalties if the funds are not used for tuition and related expenses. However, there are some important rules to be aware of:

  • The 529 plan must have been open for a minimum of 15 years
  • Contributions made to the 529 plan in the last five years, including the associated earnings, cannot be transferred to the Roth IRA
  • The Roth IRA owner must have earned income at least equal to the amount of the rollover
  • Transfers from a 529 to a Roth IRA count against the annual Roth IRA contribution limit of $6,500
  • The income limitations on Roth IRA contributions don’t apply, a 529 beneficiary could do a 529-to-Roth IRA rollover even if they earn too much to make a Roth IRA contribution for that year
  • The lifetime limit for rollovers is $35,000

Moving forward, 529 plans remain a great way to give the beneficiary a head start as they complete their college years and graduate to the world of retirement savings. We are looking forward to 2024 and are here to consult if you notice any unused 529 savings left over as we approach the rule’s launch in the new year.


Presented by Nicolette Davicino, CFP®