Brian T. Jones, CFP®
Brian T. Jones, CFP®Chairman, Financial Adviser, Principal

Section 529 plans are tax advantaged savings plans that allow you to save money for a beneficiary’s educational expenses. Sometimes referred to as “qualified education (or tuition) plans”, these plans allow for contributions into a 529 savings account to grow income tax deferred and these dollars may be withdrawn federal income tax free for education costs.

Some history….

Section 529 was originally created by Congress in 1996. This allowed for federal rules with regards to taxation of 529 plans. Numerous states have set up their own 529 plans (classified as either a tuition savings plan or a prepaid tuition plan) and these may offer additional state income tax benefits for contributions in a calendar year.

Revisions to the laws over the years have broadened this unique college funding planning tool. Today, it is possible to use up to $10,000 of 529 plan funds annually to pay for K-12 qualified education expenses.  However, there is one major development that we continue to watch with great interest: the ability to convert up to $35,000 of unused 529 plan dollars (beginning in 2024) into a Roth IRA, without being subject to income tax limitations.

In December 2022, Congress passed the Secure Act 2.0 which contained a provision allowing for a Roth IRA rollover of unused 529 plan dollars beginning in 2024. It makes sense that the goal here was to alleviate worries about incurring penalties or income tax in the event that 529 money saved over years was not needed in the future for education purposes.

As always, the devil is in the details. While final regulations continue to trickle out on this important planning issue, here are some key current specifics:

  • The 529 plan must have been open for a minimum of 15 years.
  • The owner of the Roth IRA must also be the beneficiary of the 529 plan.
  • Rollover requirement is subject to earned income, meaning the Owner must have includible compensation at least equal to the rollover amount in the current tax year.
  • Contributions made to a 529 plan in the last five years plus earnings are ineligible for a tax free transfer.
  • The lifetime limit for these rollovers is capped at $35,000 per person and is limited to the annual IRA contribution limit which in 2023 is $6,500.

As a parent of two teenagers rapidly approaching college, this will be a topic of conversation with my wife regarding the 529 plans that we have for our children. By leveraging this change in the tax code, parents can add some additional resources to their 529 plans that, if not used for college, can give their children a jump start on their retirement funding upon graduation from college.

Saving for college gets an unexpected major boost with SECURE 2.0. For working age parents looking for every tax advantaged way to save on taxes and help their children get started after college, this new benefit is an added opportunity that is worthy of your consideration.  These are the current rules as of July 2023 and as with all changes to the tax code, they are subject to change in the future.