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The new 529 rule

If you are a parent saving for your child(ren)’s future education, there is a new law within Secure Act 2.0 that you should know about. 

Starting in 2024, 529 plan beneficiaries can roll over up to $35,000 of the unused money in their plan to a Roth IRA without getting taxed or penalized on the earnings. 

The rule doesn’t immediately make us say “Let’s prioritize 529 plan savings over other vehicles.”  And there are also some limitations to the rollover provision such as:

  • The 529 plan must be opened for more than 15 years before it becomes rollover eligible.
  • The rollovers are subject to annual contribution limits.
  • Contributions made in the past 5 years cannot be rolled over.

But now that one of the tools in a financial plan just became more flexible, the new rule should bring us back to the drawing board. 

Because prior to this rule change, we were hearing a few common questions/objections regarding 529 plans from parents who are saving for their kids’ futures:

  1. What if my children don’t go to college or one of them gets a scholarship?
  2. What if higher education costs less than what we’re planning for, and we over contributed to the plan?
  3. Wouldn’t I be better off investing the money in a vehicle that has more than 10-20 years to grow and compound?

All of these are valid questions.  Before this law was passed, there were legitimate concerns with the flexibility of the 529 plan.  If you overshot your savings target and you didn’t have any more education expenses to pay for or other beneficiaries to roll the savings to, your leftover earnings could be subject to tax and penalty.  

Sometimes, this lack of flexibility would be hedged by directing a portion of the “college savings” money to all-purpose taxable brokerage accounts.  And when running cost projections to inform clients of monthly savings amounts, the 529 savings target would often be lowered to 50-75% of the projected costs to avoid excess savings and growth. 

But the new ability to roll $35,000 of the extra into a Roth IRA creates a meaningful buffer and an attractive “Plan B.”  

This rule change might allow an entrepreneur who skips college to get a big head start on their retirement savings. 

It might make a student-athlete’s scholarship a bigger thing to celebrate. 

It might enable proactive parents to save for education with more confidence and intention. 

If you are one of those parents saving for your own kids, let’s talk about how the rule change applies to your strategy.

Here is a link to a Forbes article explaining the change:

5 Big Changes To Roth Accounts In Secure Act 2.0 (forbes.com)

This content is provided for informational purposes only and is not intended as, nor does it substitute for personalized investment advice from FC Advisory, LLC. The views and opinions expressed are those of the authors and do not necessarily reflect those of FC Advisory, LLC. Always consult the appropriate professional for questions regarding the applicability of any specific issues discussed or inferred.

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Investment Advice offered through FC Advisory, LLC, a registered investment adviser doing business as Financial Coach and also doing business as New Wealth Project.

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