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529 Plan Updates from SECURE Act 2.0

Congress passed the SECURE Act 2.0 on December 23, 2022 as part of the Consolidated Appropriations Act of 2023. This piece of legislation is a follow-up to the SECURE Act 1.0 from 2019. The Act contains 92 new provisions to promote savings, boost incentives for businesses, and offer more flexibility to those saving for retirement. But one provision in particular concerns college savings plans (aka 529 plans).

In brief, SECURE Act 2.0 allows up to $35K in leftover 529 money to be transferred into a Roth IRA for the 529 beneficiary. This should provide some additional comfort to parents and grandparents who want to give their children a leg-up but have worried in the past about what to do with leftover 529 funds.

Account owners must follow a few key requirements to make a qualifying transfer from their 529 into a Roth IRA, including:

1. The 529 account must have been open for at least 15 years before you can transfer any dollars into a Roth IRA.

2. The Roth IRA account must be in the same name as the 529 plan beneficiary. If you change the beneficiary of the 529 plan, this will likely “restart” the 15-year clock (see rule #1 above).

3. The $35K is a lifetime maximum per beneficiary. This means even if you have multiple 529s in a child’s name, the most that can ever go into a Roth IRA account in their name from all 529s is $35K.

4. Any amount of money that is rolled over from a 529 plan into a Roth IRA account will be subject to the then-current Roth IRA annual contribution limit ($6,500 in 2023). So, currently it would take about six years of transfers to exhaust the $35K lifetime 529-to-Roth IRA transfer limit. There is some debate as to whether the Roth IRA beneficiary must have earned income in the year of the transfer (a prevailing rule for making a normal Roth IRA contribution).

5. The effective date for this provision of the SECURE Act 2.0 is January 1, 2024. So, don’t jump the gun and make a rollover in 2023.

6. Account holders and beneficiaries cannot rollover any contributions or earnings on contributions that were made in the last five years.

Although Congress intended this “529-to-Roth backdoor” for recent college graduates with leftover 529 funds, there is nothing in the law that I can see that would prevent anyone from opening a 529 for themself as the beneficiary, funding the 529 today with a few thousand dollars, and simply waiting 15 years to begin making their own annual 529-to-Roth IRA transfers. That being said, I’m still waiting to hear from some reputable sources that this strategy is okay before I do it myself or recommend it to my clients!

Picture of Mark Haser, M.B.A., CFP®
Mark Haser, M.B.A., CFP®
Mark is a Partner and Wealth Advisor with Artemis Financial Advisors LLC. He has an MBA from Boston College’s Carroll School of Management and is a Certified Financial Planner (CFP®) professional. Mark helps physicians and high-income families to optimize their cash flow, minimize taxes, and build a plan for long-term financial success.

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