In the ever-evolving world of financial planning, a significant change is on the horizon for families looking to optimize college savings through 529 plans. With the introduction of the 2022 SECURE Act 2.0, effective from 2024, parents, grandparents, and other family members now have a new strategy to consider in their financial planning arsenal. This guide, brought to you by Knott CPA, aims to demystify these changes and provide actionable advice for high-net-worth families with multiple children or grandparents with grandchildren.

Understanding the Change: 529 Plans to Roth IRAs

The SECURE Act 2.0 introduces a groundbreaking option for 529 account beneficiaries, allowing them to roll over funds from their 529 plan into a Roth IRA. This change offers a unique opportunity to support not just educational goals but also long-term financial well-being and retirement planning. However, to take advantage of this option, certain criteria must be met:

  1. Lifetime Limit: Beneficiaries can roll over a maximum of $35,000 to Roth IRAs over their lifetime.
  2. Annual Limits Apply: These rollovers are subject to the Roth IRA annual contribution limits, ensuring that contributions remain within standardized limits.
  3. Account Age Requirement: Only 529 accounts that have been established for more than 15 years are eligible for rollovers. Importantly, if the account beneficiary is changed, the 15-year clock restarts, affecting eligibility.

Strategic Considerations for Families

For families managing college savings for multiple children, this change introduces both opportunities and complexities. Traditionally, it was common practice to transfer unused 529 funds between siblings to maximize the utility of these savings. Now, with the option to roll over to a Roth IRA, there is an added layer to consider in managing these accounts effectively.

Avoid Resetting the 15-Year Clock

A potential pitfall arises when an older child completes their education and funds are still available in their 529 plan. Before the introduction of this new rule, renaming the beneficiary to another college-bound child was a straightforward strategy. However, with the 15-year account age requirement for Roth IRA rollovers, changing beneficiaries could inadvertently reset the clock, hindering the ability to utilize this rollover option in the future.

A Logistical Workaround

To navigate this, consider a logistical workaround: instead of changing the beneficiary of a 529 plan, execute a rollover of funds to another child’s existing 529 account. This strategy preserves the original account’s age, keeping the option for Roth IRA rollovers open. It’s important to note that such rollovers can be performed only once every 12 months, requiring careful planning and timing.

Seeking Tailored Guidance

The introduction of the option to roll over 529 plan funds to Roth IRAs is a welcome development for many families, offering a new way to think about and plan for both educational and retirement savings. However, navigating these changes can be complex, especially considering the specific needs and goals of high-net-worth families.

Vann Equity Management is here to provide expert guidance tailored to your unique situation. Whether you have questions about how these changes affect your current savings strategy or you’re considering adjustments to your plans, we’re ready to assist. Our goal is to ensure you make informed decisions that align with your family’s long-term financial objectives.

Thank you for your continued trust and partnership. We look forward to supporting you through these changes and beyond. For personalized advice and to discuss your specific situation, please don’t hesitate to get in touch.

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