Utilizing 529 Funds and Roth IRAs in tandem for a boost in each other's growth

The SECURE 2.0 Act, which came into effect at the beginning of 2024, has brought significant changes to retirement-related provisions. One of these changes is the ability to roll over funds from a 529 college savings account to a Roth IRA.

Under the new rules, an individual beneficiary can roll over up to $35,000 from their 529 plan into a Roth IRA. However, there are some conditions to be met. The Roth IRA account must have been open for at least 5 years, and the rollover contributions are subject to the annual Roth IRA contribution limits.

It's important to note that not all states match the federal tax-free treatment, so you might owe state taxes on the rollover. Also, if the 529 beneficiary is different from the 529 holder, the Roth IRA must be in the beneficiary's name.

Moreover, the Roth IRA contribution transferred from the 529 account must be covered by the beneficiary's earned income for the year. Funds from a 529 savings account can only be rolled over into a Roth IRA if the account has been open for over 15 years. Contributions made to a 529 account within the preceding five years cannot be rolled over.

The SECURE 2.0 Act does not provide specific details on the conditions for tax-free rollovers from 529 plans into Roth IRAs. It is, therefore, recommended to consult a tax professional before making such a move.

The changes aim to encourage families to open 529 savings accounts, allowing them to retain their savings and begin their retirement account on a positive note. They also aim to prevent families from being punished with tax and penalties if the beneficiary has found an alternative way to pay for their education.

For more information on 529 plans, check out the article "529 Plans: Everything You Need to Know About Saving for College." The Internal Revenue Code has been amended to allow tax-free rollovers from 529s into Roth IRAs under Section 126 of the SECURE 2.0 Act.

As of June 2024, there were 16.8 million active 529 college savings plan accounts in the U.S. Rolling over unused funds from a 529 account into a Roth IRA can help individuals avoid income tax and tax penalties that occur when withdrawing funds for non-education expenses.

The SECURE 2.0 Act encourages families to start planning for both their children's education and their retirement, providing a pathway to a more secure financial future.