Do you have a 529 Plan? Are you looking for ways to increase tax efficiency in your retirement savings plan?
If so, you’re in luck!
Starting in 2024, families have the opportunity to take advantage of a new tax law that will allow them to make a tax-free rollover from their 529 plans to Roth individual retirement accounts (IRAs).
In the world of investments, tax-advantaged accounts that offer tax-free withdrawals are a great option for families looking to plan for retirement.
With the passage of the SECURE Act in 2019 which took effect January 1, 2020, families can now rollover funds from 529 plans into Roth individual retirement accounts (Roth IRA) starting 2024.
This opens up an interesting opportunity for families to take advantage of the tax benefits associated with these two accounts.
How Tax Free Rollover from 529 Plans Work
In order to understand how this new law works, it’s important to understand what a 529 plan and a Roth IRA are.
A 529 Plan is a college savings plan that allows individuals to make contributions without having to pay taxes on those contributions.
Contributions grow tax-free, and as long as the money is used for qualified higher education expenses, you don’t have to pay taxes on withdrawals either.
This makes it an attractive option for anyone looking to save for college expenses without having to worry about paying taxes on those savings.
On the other hand, a Roth IRA is an individual retirement account that allows people to invest their earnings without being taxed on the income generated from those investments.
The SECURE Act of 2019 changed the rules around 529 plans by allowing them to be rolled over into Roth IRAs starting 2024.
This means that you can contribute up to $10,000 per year (for couples, $20,000 per year) into your Roth IRA without having to pay taxes on that contribution or any gains associated with it.
The only catch is you must have held the funds in your 529 plan for at least five years before rolling them over into your Roth IRA; otherwise, any gains will be subject to taxation.
How Can Families Use this Opportunity?
Families who have unused funds in their 529 plans can use this opportunity to fund their retirement without having to worry about paying taxes on those contributions or any gains from them.
It’s important to note that the existing qualified education expenses must be revisited and finalized before making any rollover from the 529 plans to the Roth IRA.
Consulting with a financial professional would be an ideal first step in order to understand how this may impact taxes when filing for 2025, as well as other potential benefits or issues associated with this process.
Taking the time to research and discuss with a professional is key in minimizing any potentially unforeseen effects from making a rollover from 529 plans to Roth IRAs.
Have questions? Contact us today we’re here to help guide you!