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Exciting 529 Plan News

The Secure Act

If you’ve been putting away cash for your little one’s education in a 529 Plan, we have news for you that may relieve a bit of weight on your shoulders: The SECURE 2.0 Act.


For those who are unfamiliar with the ins and outs of this plan but are considering one for a future child or grandchild, here is a quick run-down: The 529 plan gives you a tax-advantaged way to save for educational expenses from kindergarten all the way to graduate school. Just like a Roth IRA, the earnings on your investments will grow tax free throughout the life of the account, meaning it will be not subject to annual income tax. The funds can be used towards qualified education expenses, such as tuition and related fees, room and board, and books and supplies. 


In the past, there was some risk associated with potentially over-contributing to the 529; you had to be very strategic about your withdrawals, and as such, many families were concerned about what would happen to the funds if they remained unused for educational expenses. Before the SECURE 2.0 Act, if you wanted to pull funds from this account because for example, your child got a full scholarship to college, you’d either have to transfer the beneficiary to another family member, including yourself (!)  or make a non-qualified withdrawal for non-educational expenses. This withdrawal would be subject to income tax and a 10% federal tax penalty on earnings. 


Let’s fast forward to today - as of 2024, instead of paying taxes and a penalty for making that ‘non-qualified withdrawal’, you can now roll over 529 funds into a beneficiary-owned Roth IRA tax-free and penalty-free!


Sounds pretty great! … Is there a catch? Sort of!


Caveats to Consider


☝🏼 There is a cap on the amount you can roll over from a 529 plan into a Roth IRA; that is the amount subject to the annual Roth IRA contribution limits set by the IRS. This year, the annual Roth IRA contribution limit is $7,000, with an additional $1,000 allowed for individuals over 50 with the catch-up limit allowance. And long-term, there's a lifetime limit of $35,000 per beneficiary for 529 plan rollover contributions to Roth IRAs.


☝🏼 While Roth IRA contributions are usually subject to income limits, these limits are waived when rolling over from a 529 plan. This means even higher-income people can contribute to a Roth IRA through a rollover.


☝🏼 The 529 plan must have existed for at least 15 years before any rollovers can take place. 


☝🏼 Changing designated beneficiaries will likely restart this 15-year clock.


☝🏼 You cannot roll over any contributions or earnings on contributions made in the last five years.

☝🏼 If funds are leftover because the beneficiary received a scholarship, you can withdraw up to the amount of the scholarship. This withdrawal will be subject to taxation, but it avoids the 10% penalty.


While this change should allow you to breathe a sigh of relief when it comes to calculating deposits into a 529, we know there are still likely lingering questions for your specific situation! Please set some time on our calendar to discuss further! We look forward to helping map out you and your children’s future alongside you.

Your Compass Financial Team


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