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SECURE Act 2.0 - 529-to-Roth Rollovers and  Planning Opportunities

SECURE Act 2.0 - 529-to-Roth Rollovers and Planning Opportunities

| January 03, 2023
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Heed the Details. The 529 just got an upgrade thanks to the SECURE Act 2.0. Beginning in 2024, you may be able to transfer funds from a 529 directly to a Roth IRA if certain conditions are met. Here is what you need to know toward ensuring the transfer is valid:

  1. The 529 must have been maintained for a minimum of 15 years;

  2. The Roth IRA must be in the name of the 529 beneficiary;

  3. Contributions made to the 529 within the most recent 5 years and their related earnings are ineligible for transfer;

  4. The annual transfer limit is equal to the IRA contribution limit for the year, less any regular or Roth IRA contributions for the year;

    Example:
    Assume a $6,500 IRA contribution limit for 2024. For 2024 based on earned income, a Roth IRA contribution of $1,000 is made, as well as a regular IRA contribution of $2,000. The calculation would be as follows:

$6,500 - $1,000 - $2,000 = $3,500 that can be transferred from the 529 directly to the Roth IRA, assuming all other 529-to-Roth IRA conditions are met. Note: the Roth IRA owner must have enough earned income to support the total Roth contribution including the 529 rollover portion.

  1. Lifetime 529-to-Roth IRA transfers must not exceed $35,000.

Planning Opportunity Examples
Reams can be written about education and/or retirement planning alone. Specific to the SECURE Act 2.0 changes, however, I want to provide a couple of examples of potential planning opportunities.

  • In an optimum scenario, at birth, a new 529 with the child as beneficiary is established with a meaningful contribution (the 5-year election is still a great option) and maintained for 15 years. At age 16, as long as the child has earned income to support it, 529 direct transfers to their Roth IRA can begin.

    This strategy could significantly jumpstart a child’s retirement fund with exceptional tax efficiency. With the right strategy and utilizing the lifetime maximum of $35,000 via annual transfers, over $1 million could be amassed as the child reaches retirement age.

  • If the child decides not to pursue higher education, part of the strategy in reallocating unused 529 funds could be for the account holder to change the beneficiary to themselves and then begin transfers to their own Roth IRA. This is especially beneficial to high earners whose Modified Adjusted Gross Income (MAGI) exceeds income thresholds that prohibit them from making Roth IRA contributions.

Education, Retirement, Taxes, Estate Planning, Investing, Oh My…   
Understanding all the options available across financial planning areas and how they integrate is key to your financial health and success. The best recommendation is to partner with an advisor with the expertise to clarify, optimize, and empower you to make informed decisions for you and your family.

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