Enhanced Benefits of 529 Plans under the SECURE Act 2.0

Aaron Evans, CFA

While 529 savings plans have traditionally been used to fund college expenses, the recent implementation of the SECURE Act 2.0 introduces new changes that will broaden their utility.

While 529 savings plans have traditionally been used to fund college expenses, the recent implementation of the SECURE Act 2.0 introduces new changes that will broaden their utility. Starting in 2024, account owners and beneficiaries of 529 plans will have an additional option. This change presents an opportunity to transfer a lifetime maximum of $35,000 to a Roth IRA for the beneficiary, offering enhanced flexibility and financial planning prospects.

Key Changes and Considerations

Under the provisions of the SECURE Act 2.0, account owners of 529 plans can now explore the option of transferring up to $35,000 to a Roth IRA designated for the beneficiary. While this option brings forth exciting prospects, there are specific guidelines to take into account:

Eligibility Criteria: The 529 plan must have been in existence for the beneficiary for a minimum of 15 years before a Roth conversion can occur.
Contribution Limits: Annual conversions are subject to the contribution limits set for Roth IRAs, which stood at $6,500 in the year 2023.
Aggregate Limit: The total converted amount cannot exceed the aggregate sum that has been contributed to the 529 Plan within the preceding 5 years.

Previously, unutilized 529 plan funds offered limited choices such as graduate school expenses, beneficiary changes, or non-qualified distributions that attracted taxes and penalties. However, the introduction of this new rule provides a significant solution for these residual assets by placing them within a tax-advantaged account, thereby potentially augmenting an individual’s retirement savings.

Illustrative Example

Consider the following scenario to comprehend the practical benefits of this rule change:

Max’s parents had allocated $25,000 in a 529 plan for his education. However, Max embarked on his entrepreneurial journey at a young age.

Old Option: Under the conventional approach, Max would have received a distribution of $25,000, subjected to around 30% income tax and a 10% penalty, effectively yielding $15,000.
New Option: Alternatively, this sum could be gradually converted into a Roth IRA over a span of 4 years while Max is in his early 20s. Assuming a 7% annual compound return, this strategy could amass more than $300,000 in a tax-free Roth IRA by the time Max reaches 60 years of age.

This rule adjustment even extends benefits to those surpassing the income limits for Roth IRAs, offering them a strategic avenue to develop Roth assets through meticulous planning.

The modifications introduced by the SECURE Act 2.0 to 529 plans usher in a fresh array of possibilities. Beyond their original purpose of funding higher education, these plans can now serve as a vehicle to enhance retirement savings and provide increased financial security. Careful consideration of these changes and their implications can empower individuals to make informed decisions regarding their financial future.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on total client assets of over $2 billion.

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Enhanced Benefits of 529 Plans under the SECURE Act 2.0

Key Changes and Considerations

Illustrative Example

About Strategic

Disclosures

Related Resources