How Recent Changes to 529 Plan Regulations Can Support Retirement Planning

Starting in 2024, 529 plan owners now have the option to use excess 529 plan funds to jumpstart the retirement savings of their beneficiaries. If you’ve had a 529 plan open for at least 15 years and find that you no longer need it for education expenses, there’s an opportunity to maximize those funds. You can choose to transfer the funds to a Roth IRA for the beneficiary.

Here’s how it works:

    • This change benefits the beneficiary, not the 529 plan account holders. The funds from the 529 plan must be moved directly to a Roth IRA of the 529 plan beneficiary.
    • The beneficiary must have earned income equal to or exceeding the rollover amount (subject to annual limits).
    • The transfer from a 529 plan account to a Roth IRA is limited to a lifetime maximum of $35,000.
    • In 2024, Roth IRA contribution limits are $7,000 per year if the beneficiary is under 50 and $8,000 per year for those 50 and over. These limits are subject to change every year.
    • The SECURE Act 2.0 is recent, and we anticipate the IRS to provide further detailed guidelines. Additionally, individual states may have their own regulations regarding transferring surplus 529 plan funds to a Roth IRA. Due to the uncertainty surrounding future guidance, it remains unclear when providers will be able to implement this functionality.

This strategy can be particularly attractive if the beneficiary doesn’t have immediate education expenses, as it can offer tax benefits and investment opportunities.

Reach out to discuss this option and to ensure that this would align with your overall financial goals and circumstances.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Adviser. Financial and exit planning services offered through Alliance Private Wealth LLC are separate and unrelated to Commonwealth.