529 plans have been great educational tools to help families save money for college and use that money, tax-free, to pay for college expenses. While the plans are still relatively young, they continue to adapt and get new benefits as the popularity of using these accounts continues to rise.
On December 23, 2022, Congress passed a $1.7 trillion federal omnibus spending package that included a number of new rules. Section 126 of that bill included a provision that amended the Internal Revenue Code. The change allows for tax- and penalty-free rollovers from 529 plans to Roth IRA accounts starting in 2024. Here’s what you need to know.
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 to Take Place?
Section 126 becomes effective and allows for rollovers to take place after December 31, 2023. So everything will operate as-is for 2023 and then in 2024, beneficiaries will be allowed to start moving money to their IRA accounts.
What Special Rules 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 the Roth IRA annual contribution limits. The contribution limit for 2024 is scheduled to be $6,500 currently, with an extra $1,000 allowed for those individuals over the age of 50 with the catch-up limit allowance.
The beneficiary also cannot roll over any money from their 529 plan into a Roth IRA without incurring penalties and taxes unless the account has existed for at least 15 years. Changing beneficiaries also will likely restart that 15-year clock.
Accountholders and beneficiaries also 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 college without worrying about a kid not going to college. While the funds can be withdrawn and subjected to taxes at any time, now they can be rolled over tax-free.
There are still limits and it doesn’t impact you unless your 529 accounts has been open for some time, it’s a huge step in the right direction to helping families realize the value a 529 plan can bring.