The Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act, enabled the ability to convert 529 college savings plan accounts into Roth IRAs under certain conditions. This change reflects a strategic adaptation to the evolving financial planning landscape, providing savers with expanded options for managing their investment portfolios over the long term.

So what exactly is a 529? 529 plans are qualified tuition programs and get their name from Section 529 of the federal tax code. Simplified, a 529 plan is a tax-advantaged educational savings plan. The account is funded with post-tax dollars from the account holder in the name of a designated beneficiary. It grows with compounding interest, tax-free. When the beneficiary is ready, they can make tax-free payments toward qualified education expenses such as tuition, fees or room and board at any eligible school in the U.S. (and some abroad). Each state has different maximum contribution limits.

Transitioning to a Roth IRA, this retirement account where you put in money that’s already been taxed. This means when you take the money out in retirement, you don’t have to pay taxes on it again, including the money it has earned over time. Unlike other retirement accounts, you don’t have to take money out at a certain age, and you can take out the money you put in (but not the earnings) anytime without a penalty. However, there are income limits for who can put money into a Roth IRA.

Key Features of the 529 to Roth IRA Conversion

Effective Date: Starting in 2024, the new provision allows the conversion of 529 plans into Roth IRAs.

Eligibility and Limitations: The act imposes several restrictions to ensure the conversion option benefits genuine savers, including:

Contribution History: Account holders must have maintained the 529 account for a minimum of 15 years, preventing the misuse of this conversion pathway.

Contribution Caps: The law excludes contributions made to the 529 plan within the last five years and their earnings from eligibility for conversion, preserving the long-term nature of these savings vehicles.

Annual and Lifetime Limits: The Roth IRA’s annual contribution limits, which adjust for inflation, cap conversions. Furthermore, there’s a $35,000 lifetime conversion limit per individual, promoting prudent use of this option.

Tax Treatment: The conversion offers a tax-free transfer of funds, assuming compliance with Roth IRA regulations. Since 529 plan contributions are after-tax and the earnings grow tax-free, converting these funds to a Roth IRA maintains their tax-free growth, and withdrawals in retirement remain tax-free under current laws.

Strategic Considerations for Conversion

Converting from a 529 plan to a Roth IRA requires a strategic approach, tailored to individual financial situations and goals. Consider these scenarios where conversion might be beneficial:

Excess Savings: If a 529 plan’s funds exceed the beneficiary’s educational needs, conversion to a Roth IRA allows for repurposing these funds for retirement savings without incurring penalties.

Changing Educational Paths: Beneficiaries not pursuing higher education or receiving scholarships can still utilize these funds effectively through conversion.

Retirement Planning Flexibility: Families with sufficient educational funds but lacking in retirement savings can use this provision to better balance their financial planning.

Overall, the SECURE 2.0 Act’s conversion provision from 529 plans to Roth IRAs offers a progressive approach to financial planning, granting families greater versatility in saving for education and retirement. By comprehending the eligibility criteria, limitations, and strategic implications, individuals can make informed choices that support their long-term financial goals. Consulting with a financial planning professional is recommended to navigate these options and integrate them into a comprehensive financial plan effectively.