From College Savings to Early Retirement, The SECURE Act 2.0 529 Rollover

The SECURE Act 2.0 which was passed at the end of 2022 has some pretty interesting provisions in it. One that has caught a lot attention is the ability to rollover excess 529 assets to a Roth IRA for a beneficiary. This can be great for beneficiaries who receive scholarships or decide not to attend college. With this in mind, there are a few hurdles to jump that we highlight here:

1) This becomes effective in 2024,

2) The rollover will go to the beneficiaries Roth IRA, not the owner,

3) There is a 15-year rule. The 529 must have been in existence for 15 years prior to any rollover,

4) There is also a 5-year rule. 529 contributions made in the last 5 years don't count for rollover treatment,

5) There is a $35,000 lifetime cap per beneficiary,

6) There is an annual contribution limit. You can't just rollover 35K at one time and be done with it. The annual amount that can be rolled over is the same as the IRA limit which in 2023 is $6,500. The process will take a number of years and no other IRA contributions can be made by the 529 beneficiary since the rollover uses up the annual contribution limit,

7) The beneficiary will have to have income to be eligible to make the rollover. Fortunately, the Roth IRA income restrictions do not apply in this case.

While further guidance will inevitably be provided on some of these rules, it appears that this could be a long term planning strategy to help give beneficiaries a retirement boost as they start their new careers.