Secure Act 2.0 Part 4
By Ben Dolan
Of all the changes made by Secure Act 2.0, none has received more attention than Section 126, which outlines provisions regarding transfers of 529 funds to Roth IRAs. While the new rules allow for certain planning opportunities, less attention has been paid to the conditions required for transfer, which are many. Writing for IRAhelp.com on January 23rd, Ian Berger outlined many of these conditions:
- The $35,000 limit is a lifetime maximum.
- The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if different).
- The 529 plan must have been open for more than 15 years. It’s not clear whether a new 15-year waiting period is required when someone changes 529 beneficiaries or if the waiting period that applied to the prior beneficiary can be tacked on. We’ll need further clarification from Congress or the IRS.
- Rollover amounts can’t include any 529 contributions (and earnings on those contributions) made in the preceding five-year period.
- Rollovers are subject to the annual Roth IRA contribution limit. So, for example, if the Roth IRA contribution limit in 2024 remains $6,500, then no more than $6,500 can be rolled over from a 529 to a Roth IRA in 2024. Further, any actual Roth IRA (or traditional IRA) contributions made by the 529 beneficiary would count against the $6,500 limit. The effect of this rule is that a full $35,000 529-to-Roth IRA rollover would need to be done over several years. It also means that the 529 beneficiary doing the rollover must have compensation in that year at least equal to the amount being rolled over.
- By contrast, the income limitations on Roth IRA contributions don’t apply to these rollovers. A 529 beneficiary would be able to do a 529-to-Roth IRA rollover even if she earns too much to make a Roth IRA contribution for that year.
Assuming Congress does not impose an additional 15-year waiting period on new beneficiaries, 529 account owners with funds not used for the educational needs of their children could transfer the funds to a Roth IRA to be used for retirement or for inheritance purposes.
For those interested in moving assets to a younger generation, funding a 529 for a young child with the intent of transferring the assets to a Roth IRA in their name would also be an option (assuming the child has earned income, a requirement for IRA contributions).
Stay tuned for more Secure Act 2.0 updates!
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors a North Carolina state-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.