Parents and Grandparents of school aged children are well aware of the tax advantages of 529 educational savings plans: they can contribute funds toward a student’s qualified higher education expenses (tuition, fees, books, room and board) then withdraw the money as needed without incurring federal taxes.

If the plan is overfunded, another eligible family member can be made the beneficiary of the plan. Still, many times excess funding remains in the account. So…

Starting in January, the Secure 2.0 Act makes it possible to redirect monies from a 529 directly into a Roth IRA without penalty or recognition of taxable income.

A Roth IRA is an individual retirement account to which you contribute after tax dollars that can appreciate and eventually be withdrawn on a tax free basis.

The effect of COVID on college education is, in part, responsible for this new rollover opportunity. Many students couldn’t live on campus or chose to discontinue their educations for other opportunities.

The Senate Finance Committee saw the need to create the new law:

“Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a nonqualified withdrawal and assume a penalty. This has led to hesitating, delaying or declining to fund 529s. Families who sacrifice and save in 529 accounts should not be punished with a tax and penalty years later if the beneficiary has found an alternative way to pay for their education.” ¹

As a result, starting in 2024, you can use higher education savings to give your student a jump on his or her retirement savings.

There are specific requirements:

• The 529 plan has been in existence for 15 years.
• The Roth IRA will benefit the same individual beneficiary named in the 529.
• Any 529 contributions made within the last 5 years are ineligible.
• The rollover is subject to the up to the $6500 Roth IRA limit (in 2023).
• The lifetime maximum rollover amount is $35,000.

Consult your Wealth Manager for clarification and more information about this new 529 rollover opportunity.

At Bahl & Gaynor we stand ready to help guide you through all of the changes that impact your financial plan. Call us at 513.287.6100, or go to www.bahl-gaynor.com to learn more about our boutique wealth management services.

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¹ https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf
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