529 savings plans have long been the preferred choice for college savings for parents and grandparents alike. They offer tax-advantaged growth and withdrawals for qualified educational expenses. However, for investors who feel that the plans’ rigid guidelines restrict options for the beneficiary, there has always been reason for caution. What happens, for example, when education goals change and 529 savings go unused? A good question, indeed, and as of next year, there is an answer that many will like.
As of January 1, 2024, this reason to shy away from 529s will go away. A provision of the Secure 2.0 Act kicks in that allows 529s to be converted into Roth IRAs.1
The 529 You Knew
The traditional limitation of 529 plans was that funds were strictly for direct educational costs like tuition and books. Gradual expansions included continuing education and student loan repayments, but the usage restrictions still remained a concern for many. One scenario would bet that a student received scholarships, making the savings—or at least a portion of them—no longer needed. Another scenario: the student pursues a career that doesn’t include going to college. In both of these cases, the funds could be transferred to a different beneficiary, but that’s not always an option, either.
Withdrawing funds from a 529 would trigger taxable events and, potentially, a penalty on the earnings. So, the risks of investing in a student’s future have been significant in certain situations, until now.
Secure 2.0 Act and 2024
The Secure 2.0 Act was signed into law as part of the Consolidated Appropriations Act of 2023. It has brought significant changes to retirement and education savings plans. Starting in 2024, it allows for tax- and penalty-free rollovers from 529 plans into a Roth IRA for the same beneficiary. Of course, this significant provision comes with certain conditions: the 529 plan must have been open for at least 15 years, and the total amount that can be rolled over is capped at $35,000 over the beneficiary’s lifetime. This change addresses the risk of overfunding 529 plans mentioned above, and it aligns with the act’s broader goal of enhancing retirement savings and expanding employee participation in retirement plans.2
The Benefits of the “New” 529 Plan
• Retirement Planning Security: Allows families to repurpose unused education funds for retirement savings, adding another layer of financial security.
• Reduced Overfunding Risk: Mitigates the concern of over-investing in 529 plans, giving parents more confidence in their savings strategy.
• Enhanced Savings Options: Creates a dual-purpose for 529 plans, serving both educational and retirement savings goals.
• Long-term Financial Flexibility: Offers a safety net for parents who overestimate their child’s educational needs or for funds remaining after the child’s education is complete.
With this new flexibility, families can approach 529 plans with less apprehension about overfunding. They can now balance their college savings—even private school funding—with retirement planning, using the 529 plan as a dual-purpose financial tool.
The Takeaway
The 2024 changes to 529 plans represent a significant shift in financing options for college and retirement planning. Families now have the opportunity to aim at maximize their savings, alleviating concerns about unused education funds. As always, we suggest that you consult with your financial advisor to effectively navigate these new options and integrate them into your broader financial strategy. And, by the way, Happy New Year!
Sources:
1 https://www.congress.gov/bill/117th-congress/house-bill/2617
2 https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira
Disclosure: This information is for educational and informative purposes and shall not be considered a specific recommendation. Readers are advised to speak with their advisor at JL Bainbridge to determine their specific recommendations that meet their investment objectives and to review their portfolios. The material being provided is thought to be accurate. However, the information is compiled from multiple resources and may become outdated or otherwise rendered incorrect by new research or corrections without notice. J.L. Bainbridge & Co., Inc., is not a broker dealer and does not offer tax or legal advice. Please consult your tax or legal advisor for assistance regarding your individual situation. It should neither be assumed that future results will be as profitable or that a loss could not be incurred. For more information related to our firm, please see our disclosure brochures at jlbainbridge.com and https://adviserinfo.sec.gov/firm/summary/108058.
