Exploring 529 Plans: Flexibility for Retirement Savings and Tax Strategies

Rolling Over 529 Plan into Roth IRA

529 plans have long been trusted for saving for higher education expenses. With the passing of recent legislation, new possibilities have opened. The SECURE Act 2.0 presents an excellent opportunity to optimize education savings and retirement planning. By leveraging the expanded options available through 529 plan rollovers, beneficiaries have additional options for unused funding. Starting in 2024, beneficiaries of 529 accounts will have the option to make tax-free and penalty free rollovers up to a maximum of  $35,000 over the course of their lifetime into a Roth IRA. It is important to remember certain criteria must be met to take advantage of this feature.

Key Considerations

Minimum 15-year duration:
The 529 plan must be open for at least 15 years to be eligible for rollovers.

Beneficiary ownership:
The owner of the Roth IRA must also be the beneficiary of the 529 plan.

Compensation requirement:
The rollover is contingent upon the Roth IRA owner having income/compensation equal to or exceeding the rollover amount.

Exclusion of recent contributions:
Contributions made within the past five years, including associated earnings, are ineligible for tax-free transfers.

Roth IRA contribution limits:
Rollovers from a 529 plan to a Roth IRA count against the annual contribution caps of the Roth IRA, which are currently set at $6,500.

Lifetime rollover limit:
The maximum allowable rollover amount over an individual’s lifetime is $35,000.

Tax-Smart and Estate Planning Strategies of 529 Plans

If a Roth IRA Rollover is not an option, 529 plans still can offer tax-smart strategies that can significantly enhance your financial planning – so there are alternative options regarding 529 Plans savings.

Gifting Strategies. 529 plans offer unique gifting opportunities, allowing individuals to contribute significant amounts without incurring gift taxes. The annual gift tax exclusion allows you to make a lump-sum contribution to a 529 plan without triggering gift taxes. This exclusion amount is set by the IRS and is subject to change, so it is advisable to consult with a tax professional to ensure compliance with the current regulations.

Furthermore, there is an option to front-load up to five years‘ worth of contributions into a single year without incurring gift taxes. Front-loading the plan allows earnings to be compounded on more money over a longer period. In other words, the more you put in initially, the longer the money has to grow, and the greater the tax-free balance when the funds are used for higher education.

Changing Beneficiaries. Flexibility is a key feature of 529 plans, particularly when it comes to changing owners & beneficiaries. If the original beneficiary of a 529 plan does not use all the funds or does not pursue higher education, you can change the beneficiary to another qualified family member without tax consequences. This flexibility can extend multi-generationally, so owners could view unused funds as a smart way to save for future generations.

State Tax Benefits. In addition to the federal tax advantages, many states offer their own tax incentives for 529 plans. These benefits can take the form of deductions or credits for contributions made to the plan. The specific tax benefits vary by state, so it is essential to familiarize yourself with the rules and regulations of your state‘s plan. By leveraging these state tax benefits, you can potentially reduce your overall tax liability and maximize the growth of your educational savings.

Estate Planning Benefits. Another significant aspect of 529 plans is the estate planning benefits. Contributions to a 529 plan can be considered completed gifts for estate tax purposes. By transferring assets into a 529 plan, you may potentially reduce the size of your taxable estate, minimizing estate taxes. This can be a valuable strategy for individuals who want to pass on assets to their beneficiaries while preserving more of their wealth.

Source: H.R.2617 – Consolidated Appropriations Act, 2023

As education and retirement planning can be complex, always work with an estate attorney, tax professional, and financial advisor to put all the pieces in place. As always, please feel free to reach out with any questions.

The 529 Plan information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal advice. Tiller Private Wealth does not provide legal advice. Tiller Private Wealth cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Federal and state laws and regulations are complex and are subject to change. Always consult an attorney regarding your specific legal situation.