Under legislation signed into law last month with the passage of the Setting Every Community Up for Retirement Enhancement (“SECURE 2.0”), investors can roll up to $35,000 from a 529 account into a Roth individual retirement account starting in 2024. The move converts leftover money originally intended for a child’s college (or kindergarten through 12th grade) costs into retirement dollars, all without costing the beneficiary a tax bill. With tax-free growth and withdrawals, Roths are an engine of outsize savings and a favorite of wealth advisors, especially those to the affluent.
The benefit is part of a $1.7 trillion federal spending bill that contains a welter of provisions aimed at improving Americans’ retirement readiness, including that of higher earners. Among the package’s changes:
- The age to start taking required minimum distributions from traditional individual retirement plans and 401(k)s rises to 73 this year and to 75 a decade later, giving accounts more time to grow in value.
- Penalties for not taking RMDs are cut in half.
- Companies can make matching contributions to employer-sponsored Roth accounts.
- The current $1,000 catch-up contribution to traditional IRAs will be indexed for inflation for those aged 50 and older come 2024.
Assuming a conservative, long-term return of 6%, $35,000 in a Roth would grow to more than $150,000 after 25 years, and to over $268,000 after 35 years.
Generally, a parent or grandparent sets up a 529 for a younger family member. Owners can also set one up for themselves or change a beneficiary, to, say, a younger child if the older one doesn’t go to college or gets a scholarship and doesn’t need all of the money. If a beneficiary gets a full scholarship to college, the penalty for withdrawing the cash is waived.
Previously, if a saver was stuck with money in a 529 because their child didn’t go to college the only way to get the funds out was to pay the tax bill. Now $35,000 can be converted into a Roth, tax-free. The new law says that a 529 account has to be in existence for at least 15 years before being rolled into a Roth IRA. Additionally, contributions and growth from the past five years can’t be shifted over.
Written by David Neuman, JD
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