Recently departed, but timelessly respected, Charles Munger of Berkshire Hathway once said,

‘Spend less than you make; always be saving something.

Put it into a tax-deferred account. Over time, it will begin to amount to something.

This is such a no-brainer.’

 Many of us have already acted on his or similar advice, as we have contributed into investment vehicles like IRAs and 529s for ourselves or younger versions of ourselves in the form of our children and grandchildren. Others, however, have delayed making such commitments as they continue to weigh the ‘what ifs’, including…

What if…I need the money for a different purpose than what was initially intended?

What if…my child gets a scholarship and we have invested too much in their 529?

What if…my grandchild attends a lower cost college or does not pursue an undergraduate or graduate degree at all?

While everyone’s situation may be unique, a new provision included in the SECURE 2.0 Act applies to us all, and while it may not solve for all of the ‘what ifs’, it certainly is a welcomed enhancement.

Starting in 2024, SECURE 2.0 Act proposes that up to a lifetime limit of $35,000 of unused 529 assets can be rolled into the account beneficiary’s Roth IRA without incurring the 10% penalty and without generating taxable income.

This new provision creates flexibility by offering another option for those who do not need the fund for any other family members for education purposes. So, what do you need to know?

Rollover Considerations

  • You must own the 529 for a minimum of 15 years before you can execute a tax-free rollover.
  • Any contributions you’ve made into the 529 within the most recent five years are not eligible to be rolled over.
  • The beneficiary of the 529 plan must also be the owner of the Roth IRA.
  • The owner must have earned income at least equal to the amount of the rollover in any given year.
  • The rollover cannot exceed the annual Roth Contribution Limit, which is $7,000 in 2024 and may adjust annually, which means that it will take years to convert the maximum lifetime cap.
  • For those more creatively inclined, there has not yet been any instruction from the IRS regarding how ownership changes may affect eligibility.

While this provision has been written into law, it is not yet entirely clear how the IRS will interpret this change in terms of how it will be implemented. Keeping that in mind, we recommend the following:

Stay the course until you can talk with a tax professional to evaluate what options may be available. It will be important to understand fully how this change may apply to you and your family.

Consider opening and funding a Roth IRA. If the child has earnings, contributions may be made directly into the Roth up to the annual cap. That contribution can come from the child’s earnings directly, or via a gift from a parent or other family member. This could help get your young relative more engaged at an earlier age to save, may help fund their retirement savings while their personal income tax rate is lower, and extends the time for funds to grow for their future.

While the 529 to Roth conversion may not be the panacea, we value the flexibility it provides for those stymied by some of the ‘what ifs’, as well as for those searching for smart ways to save for the future. We look forward to partnering with you and your professional advisors to ensure that you have what you need to make the best-informed decisions for you and your family. Contact Ally Powers by calling 574-295-7751 or send an email to [email protected] for more information.

This information is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Clients should consult their own tax, legal and accounting advisors before engaging in any transaction.

 

Not Insured by FDIC or Any Other Government Agency Not Bank Guaranteed Not Bank Deposits or Other Obligations May Lose Value