By Katherine Vessenes, JD, CFP®

You may have heard the buzz surrounding developments with SECURE Act 2.0. Today, we're diving into the new IRS rules that would allow rolling over 529 plans into a Roth IRA. Let’s unravel this news and determine if it's a viable option for you.

Understanding Roth IRAs and 529 Plans:

Before delving into the specifics, let's recap. Roth IRAs are post-tax accounts that offer tax advantages, allow tax-free growth and withdrawals in retirement.

529 plans are accounts specifically designated for education expenses. They offer tax-deferred growth and tax-free withdrawals for qualified educational expenses. Previously, unused funds could not be used for non-education expenses or moved without incurring a 10% penalty.

The 529 Plan to Roth IRA Rollover:

The SECURE Act 2.0 introduced the 529 plan to Roth IRA rollover, aiming to provide an avenue for unused 529 plan funds to enter Roth IRAs. While this sounds promising, the devil lies in the details, as we'll explore below.

Beneficiary Ownership: Rollovers must be made into the Roth IRA of the 529 plan beneficiary, not the owner. This restricts parents from rolling over funds into their own Roth IRAs.

Lifetime Limit: The maximum rollover amount is capped at $35,000 per beneficiary, without adjustments for inflation. This limit applies per beneficiary, not per account.

529 Plan Age Requirement: The 529 plan must be open for at least 15 years before rollover eligibility.

529 Plan Funds Age Requirement: Contributions made within the preceding five years cannot be included in rollovers.The funds must have been in the account for five or more years prior to the rollover date.

Annual Contribution Limit: Just like regular Roth IRA funding, rollovers count towards the annual Roth IRA contribution limit, currently set at $7,000 for 2024. For example, if you fund $5,000 into your Roth IRA, you are only able to rollover $2,000 from your 529 plan so that you do not exceed the limit for the year. This will necessitate multiple years to reach the $35,000 cap.

Beneficiaries Must Have Earned Income to Roll Over Funds: Also similar to regular Roth IRA funding rules, the owner of the Roth IRA must have earned income to roll over 529 plan funds. If your child is the beneficiary of the 529 plan and you want to roll over some funds into their Roth IRA, but they only have $4,000 earned income for the year, the most you can roll over into their Roth IRA is $4,000. You can fund more than their annual income into their Roth IRA.

Given the complexity and potential risks, seeking guidance from financial advisors or accountants well-versed in these matters is crucial. While the new rules offer a tantalizing prospect, navigating the nuances requires careful planning to avoid unintended consequences. Remember, financial security is paramount, and informed decision-making is key to achieving it.

Skepticism is warranted amidst the hype surrounding SECURE Act 2.0 on its changes to 529 plans and Roth IRAs. Don't be swayed by sensational headlines. Instead, arm yourself with knowledge and seek expert advice tailored to your unique financial situation. Together, let's plan, protect, and prosper for a secure financial future.

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Stay connected with MD Financial Advisors for regular updates and insightful discussions on financial matters. Your financial well-being is our priority, and we're here to guide you every step of the way. Don't hesitate to reach out with questions or topics for future episodes. Until next time, take care and prioritize your financial health.

To learn more about these topics or access the previous episode Katherine mentioned, check out these hand selected posts:

Roth IRAs for Doctors Podcast: https://mdfinancialadvisors.com/money-minutes-for-doctors/roth-iras-podcast?rq=Roth%20IRA

529 Plans Podcast: https://mdfinancialadvisors.com/money-minutes-for-doctors/529-day-podcast?rq=529

SECURE Act 2.0 Article by Josh Lantz: https://mdfinancialadvisors.com/blog/secure-act-2?rq=529%20plan

Listen on Apple Podcast, Amazon Music, or Spotify.

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Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.