Skip to content
Planning Best Practices
Subscribe
August 2023

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 client assets of over $2 billion.

Overview

Disclosures

Strategic Financial Services, Inc. is registered with the Securities and Exchange Commission (SEC) as an Investment Advisor. The term “registered” signifies compliance with regulatory requirements and does not imply a certain level of skill or training.

The information provided on our website, including weekly market commentaries, financial planning articles, and other educational resources, is intended solely for educational purposes. It is designed to offer insights into financial planning and investment management, aiming to enhance understanding of financial concepts, strategies, and market trends. This content should not be interpreted as personalized investment advice or a recommendation for any specific strategy, financial planning approach, or investment product. Financial decisions are deeply personal and should be made considering the individual’s specific circumstances, goals, and risk tolerance. We recommend consulting with a professional financial advisor for personalized advice.

Please be aware that Strategic Financial Services, Inc. does not provide legal or tax advice. The content on this website is not intended to be used as such or as a substitute for legal or tax advice from a licensed professional. We advise seeking guidance from qualified legal and tax advisors regarding these matters.
Investment Risks and Portfolio Management.

The discussion of any investments on this website is for illustrative purposes only and provides no guarantee that the advisor will make any investments with the same or similar characteristics as those presented. The investments identified and described herein do not represent all the investments purchased or sold for client accounts. The selection of representative investments to discuss is based on various factors, including recent company news or earnings releases.

It should not be assumed that any investments discussed were or will be profitable. All investments involve risk, including the potential loss of principal. There is no assurance that investments mentioned will remain in client accounts at the time you view this information.

When index returns are mentioned on this site, they are provided as a general indicator of market conditions and are not representative of any client’s portfolio performance. Indices are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. Therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

While index returns are used as a framework to report on general market conditions, they should not be construed as an indicator of future performance of any specific investment or portfolio. Discussion of index returns is intended to provide context and insight, not to suggest that clients will achieve similar results. Each client’s portfolio is managed according to their specific investment goals and financial situation.

The opinions and any forward-looking statements expressed in the articles and videos featured in our resource center are as of the date of publication. These statements are based on current laws, regulations, market conditions, and other relevant factors, including third-party data. Given the dynamic nature of financial and regulatory environments, as well as potential changes in market conditions or economic circumstances, the information provided may become outdated or may no longer be accurate.
We rely on third-party data to form our opinions and projections, which means that these are subject to the same uncertainties that affect all data-dependent analyses. As such, we advise readers to exercise caution and not rely solely on the statements made herein for making financial decisions. It is recommended that investors consult with a professional advisor who can help assess the relevance and accuracy of the content in light of the current economic climate and personal financial situation.

Our website contains links to third-party websites as a convenience to our users. Strategic Financial Services, Inc. does not control, endorse, or guarantee the content found on such sites. We are not responsible for the accuracy, legality, or content of the external site or for that of subsequent links.
Contact the external site for answers to questions regarding its content.
The inclusion of any link does not imply our endorsement of the site, nor does it imply any association with its operators. Use of any such linked website is at the user’s own risk.

Related Resources