From the Desk of Kaylyn Bugay: Expanded Rules for 529 Accounts

Saving for education is a cornerstone of financial planning for many families. One popular tool for this purpose is the 529 plan, a tax-advantaged investment account designed specifically to help pay for qualified educational expenses. In the past several years, new legislation has provided several updates that expand the flexibility of 529 plans. One such change is a new provision in the Secure 2.0 Act that allows 529 funds to be rolled to Roth IRA accounts beginning in 2024.

One of the biggest drawbacks of 529 plans historically has been how to handle leftover funds without incurring tax or penalty on withdrawals. While it was possible to change beneficiaries to shift the tax-free benefit from one individual to another, this remained restrictive to many. Under new rules, eligible 529 funds can now be rolled into Roth IRA accounts – though the process includes multiple noteworthy caveats outlined here:

  1.  The 529 beneficiary and Roth IRA owner must be the same person
  2.  The 529 account must have been open for at least 15 years
  3.  Rollover funds cannot exceed a lifetime cap of $35,000
  4.  Annual transfers are capped at the maximum annual Roth contribution limit ($7k in 2024) and are limited by any ordinary Roth contributions
  5.  Rollover funds cannot exceed the total amount contributed to the 529 account (including earnings) before the five-year period prior to the rollover
  6.  Transfers must be made trustee-to-trustee
  7.  You may also have to conform to the earned income requirement currently in place for Roth accounts, although no official guidance confirms this as of this writing

Other recent changes, in case you missed them, include the following:

  • The expansion of qualified expenses. In prior years, 529 accounts could only be used for college expenses such as tuition, room & board, and textbooks. New rules allow 529 funds to cover a broader range of educational expenses, including K-12 expenses, apprenticeship programs, and – importantly – up to $10,000 toward student loan repayments.
  • Reduced impact to FAFSA filings. Beginning with the 2024-25 school year, distributions from a grandparent or other, non-parent owned 529 account will no longer have to be reported on the FAFSA as untaxed income for a student.

Whether you’re saving for college, K-12 education, or vocational training, understanding and leveraging these rules can help you make the most of your 529 plan and provide a solid financial foundation for your loved one’s future.