By Brian McKinney, CFP^®

Published in the Baltimore Business Journal on November 24, 2023

As a financial advisor catering to a diverse clientele with children of all ages, college planning is a recurring topic in my comprehensive financial planning discussions. Our team dives deep into where our clients’ children (or grandchildren!) aspire to attend college and how much it might cost by the time they are 18 years old (of course, including inflation in these calculations), and we develop a savings strategy to achieve this ever-important goal. However, amid these conversations, I have been asked the following question numerous times: "What happens if our children choose not to attend college?" While options exist to address this scenario today, the new SECURE 2.0 Act, set to take effect in 2024, introduces a fresh strategy to our financial planning arsenal. Your 529 plan could soon become a pivotal asset, not just for educational aspirations, but for retirement too. 

A Gift with Long-Term Potential

Starting in 2024, 529 account holders will gain the ability to transfer a lifetime limit of $35,000 to a Roth IRA for the beneficiary. You might be wondering, what makes this Roth IRA rule so special? Well, it's not merely about college savings anymore. 

With this notable change, even if your child or grandchild opts not to pursue higher education or if the funds in the 529 plan remain untouched, possibly due to scholarships, your contributions will continue to play a vital role in their financial stability. Your thoughtful investments in the 529 plan can now be repurposed to offer them a head start on their retirement savings journey.

 

Key Takeaways to Know

The combination of tax-free growth and the new possibility of transferring unused funds to a Roth IRA tax-free now makes the 529 plan an even more invaluable tool for financial planning. However, before you delve into the nuts and bolts of this exciting opportunity, it's essential to keep in mind the following rules:

1. The 529 plan must be held for the designated beneficiary for at least 15 years.
2. The Roth IRA must be in the name of the beneficiary of the 529 plan.
3. Annual conversions can't exceed the annual Roth IRA contribution limit.
4. The amount of 529 account funds converted to a Roth IRA should not exceed the aggregate amount contributed to the 529 plan account in the five years before the Roth IRA conversion.

Income Considerations

In contrast to regular Roth IRA contributions, there are no IRS-imposed income limitations for rollovers from 529 plans to Roth IRAs. This means that even if the beneficiary's income exceeds the 2024 Roth IRA contribution limit, you can proceed with this financial maneuver without worrying about income phaseouts.

It is also important to note that the 529 beneficiary must have earned income equal to or exceeding the amount of the Roth IRA transfer. In simple terms, if the maximum Roth IRA contribution is $6,500, they must earn at least $6,500 to make the full contribution. 

 

Changing Beneficiaries – What Happens Then?

If you decide to change beneficiaries on your 529 plan, you may be concerned about its impact on the 15-year holding period. Regrettably, the answer to this question remains unclear. The statute does not provide a straightforward response, and clarity may only come from future actions by Congress or the IRS. Until that happens, it's prudent to exercise caution when changing beneficiaries. It may be wise to consult with a financial professional before making these changes to ensure any potential tax implications are managed.

If you are in fact diligently saving for a loved one's future through a 529 plan, remember that your financial foresight is not limited to education alone anymore. In the event the funds go unused for higher education, it's about securing a bright and stable future for your nearest and dearest. The SECURE 2.0 Act is poised to make your financial planning more adaptable and promising than ever before. So, come next year, the recipient of your 529 account will enjoy increased flexibility, whether that means covering educational expenses or bolstering their retirement nest egg.

 

---

Brian McKinney, CFP®, is a Financial Advisor with Williams Asset Management. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. He offers advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, a Registered Investment Adviser. Fixed insurance products and services offered by Williams Asset Management. For additional information about the services of Williams Asset Management, please call (410) 740-0220 or email at [email protected]. © Williams Asset Management. For more information about Williams Asset Management, please visit www.WilliamsAssetManagement.com.