New Planning Opportunities for 529 Plans
SECURE Act 2.0 was signed into law by President Biden in the final days of 2022. Amid the holiday festivities and preparations for the New Year, you may have caught snippets of discussion or read an article regarding the impacts and changes brought on by this legislation. While the bill is wide-ranging, let’s take a closer look at one adjustment in particular: 529 Education Savings Plans being moved into Roth IRAs, and the potential planning opportunities this change may present.
Prior to SECURE Act 2.0, overfunding was an area of concern when contributing to 529 plans. That is, what happens if there are excess funds in the plan? Under the former rules, 529 plan owners were limited to three options: take a non-qualified withdrawal (and be subject to a 10% penalty), change the beneficiary of the 529 plan or leave any unused funds in the plan.1
SECURE Act 2.0 legislation introduced a fourth option that takes effect on January 1, 2024: a penalty-free “escape hatch” that allows excess funds in 529 plans to be rolled into a Roth IRA in the beneficiary’s name.2 As to be expected, there are some limitations to these rollovers, in order to prevent misuse. Here are some primary limitations:
- Rollovers to a Roth IRA are subject to the annual IRA contribution limit ($6,500 in 2023, $7,500 for age 50 and older)
- The 529 plan needs to have been opened for 15 years
- Contributions made in the past five years are not eligible for rollover
- A lifetime limit on rollovers to a Roth IRA that totals $35,0003
Any time there is a new tax law or legislative change, the financial planners at Corient are hard at work dissecting the changes, and thinking of ways any new development may benefit our clients. This particular change presents two interesting planning opportunities to discuss with your advisor.
Revisit your funding strategy
529 funding plans may have been designed to prevent excess contributions with the understanding that out-of-pocket payment may be needed for some expenses. If a goal of yours is to fund education and help your beneficiary get an early start on saving for retirement, it could make sense to plan for an excess balance, with an eye toward eventual Roth rollovers.
Future parents can get a head start
Contributing to a 529 plan prior to having a child has always been an option for would-be parents. The risk of this head start would be never having children, and the contributed funds subsequently being “trapped” in the 529. As we know, this is no longer the case. Those who are planning for or likely to have a child can be more comfortable starting to save, secure in the knowledge that there is another penalty-free option to fall back on, if needed.
As always, if you’d like to discuss your personal plan or situation, reach out to your Corient Wealth Advisor.
1 https://www.forbes.com/sites/markkantrowitz/2021/12/25/what-can-you-do-with-leftover-money-in-a-529-college-savings-plan/?sh=170999224ee7
2 https://www.forbes.com/sites/leonlabrecque/2023/01/21/new-secure-20-planning-move--529-to-roth/?sh=76ea89075b55
3 https://www.smart529.com/smart529-details/roll-over-unused-529-funds-to-roth-ira-accounts.html#:~:text=The%20eligible%20rollover%20amount%20must,for%20each%20529%20account%20beneficiary
ABOUT THE AUTHOR
John Beck
John is responsible for analyzing the client’s financial picture, preparing recommendations, and supporting Wealth Advisors in our development of strategies to help clients reach their goals.
John attended Washington College, earning his degree in Economics while competing for the men’s baseball team. Prior to joining legacy firm RegentAtlantic, John worked as an advisor at TIAA. In his free time, John enjoys golfing, skiing, and is an avid Yankees fan. He currently resides in Cedar Grove, NJ with his wife, Taylor, and Aussiedoodle, Lola.
CONTENT DISCLOSURE
This information is for educational purposes and is not intended to provide, and should not be relied upon for, accounting, legal, tax, insurance, or investment advice. This does not constitute an offer to provide any services, nor a solicitation to purchase securities. The contents are not intended to be advice tailored to any particular person or situation. We believe the information provided is accurate and reliable, but do not warrant it as to completeness or accuracy. This information may include opinions or forecasts, including investment strategies and economic and market conditions; however, there is no guarantee that such opinions or forecasts will prove to be correct, and they also may change without notice. We encourage you to speak with a qualified professional regarding your scenario and the then-current applicable laws and rules.
Advisory services are offered through Corient Private Wealth LLC and its affiliates, each being a registered investment adviser (“RIA”) regulated by the U.S. Securities and Exchange Commission (“SEC”). The advisory services are only offered in jurisdictions where the RIA is appropriately registered. The use of the term “registered” does not imply any particular level of skill or training and does not imply any approval by the SEC. For a complete discussion of the scope of advisory services offered, fees, and other disclosures, please review the RIA’s Disclosure Brochure (Form ADV Part 2A) and Form CRS, available upon request from the RIA and online at https://adviserinfo.sec.gov/. We also encourage you to review the RIA’s Privacy Policy and Code of Ethics, which are available upon request.
Our clients must, in writing, advise us of personal, financial, or investment objective changes and any restrictions desired on our services so that we may re-evaluate any previous recommendations and adjust our advisory services as needed. For current clients, please advise us immediately if you are not receiving monthly account statements from your custodian. We encourage you to compare your custodial statements to any information we provide to you.
