New Rules for 529 Plans

New Rules for 529 Plans

May 31, 2023

529 plans have always been great vehicles to help families save money for education and use that money, tax-free, to pay for qualified education expenses.

Recently, Congress passed a spending package that included a number of new rules. One of the new rules included a provision that amended the Internal Revenue Code. The change allows for tax- and penalty-free rollovers from 529 plans to Roth IRA’s starting in 2024!

How Much Can Be Rolled Over?

The new rule allows beneficiaries of the 529 plan to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to a Roth IRA in their name.

When Can Rollovers Start?

The new rule becomes effective after December 31, 2023. So, start planning now!

Are There Any Special Rules That Apply to the 529 Plan Rollovers?

Any amount of money that is rolled over from a 529 plan into a Roth IRA account will be subject to Roth IRA annual contribution limits. The contribution limit for 2024 is scheduled to be $6,500 for those under 50 and $7,500 for folks over the age of 50.

The beneficiary cannot roll over any money from their 529 plan into a Roth IRA without getting hit with penalties and taxes unless the account has existed for at least 15 years.

Accountholders and beneficiaries cannot roll over any contributions or earnings on contributions that were made in the last five years.

The Bottom Line

This is a huge change for the 529 industry, giving everyone another reason to save for education without worrying about a kid not going to college. While the money in a 529 can be withdrawn and subject to taxes at any time, they can also now be rolled over to a Roth tax-free.

There are still limits but it’s a huge step in the right direction to helping families realize the value a 529 plan can bring!

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.