ARTICLE | June 16, 2023

For clients looking to fund college costs or private secondary school costs for children or grandchildren, Section 529 plans have historically been a great tool. Some of the key characteristics are as follows:

• Tax-free growth within the 529 plan account as long as distributions are used for qualified education expenses (including tuition, fees, books, equipment, and room & board).
• Completed gift for tax purposes, so the value of the account is removed from the donor’s taxable estate, even though the donor can control the timing of distributions.
• No AGI limitations for the donor.
• Ability to front load 5 years’ worth of annual gifts in the initial year ($17,000 X 5 yrs = $85,000) if gift return filed with the proper election.

For clients establishing these accounts, many have expressed concern about overfunding the needs of the student and options for any excess after the student is done with school. Up until recently, the options were as follows:

• Distribute the remaining funds to the student, paying income tax plus a 10% penalty.
• Roll over the account to another qualifying family member (typically to a sibling, but could also include the student’s spouse, children, nieces, nephews, or first cousins).

With the passing of SECURE Act 2.0, an additional option is now available for any excess unused funds. Starting in 2024, with certain limitations, unused funds can now be rolled over into a Roth IRA for the beneficiary/student. Eligibility and criteria for this option include:

• Lifetime limit of $35,000 for rollovers.
• The 529 plan account must have been open for a minimum of 15 years.
• The Roth IRA owner must have includible compensation at least equal to the amount of the rollover in the rollover year.
• Contributions made to the 529 plan account within the last 5 years are ineligible.
• Rollovers count toward the owner’s yearly contribution limit, so they may not be eligible to make other Roth contributions in the rollover year.

This new option for excess funds should be considered when exploring whether to open and fund Section 529 plan accounts for children and grandchildren. A rollover to Roth IRA would be an excellent result for a child or grandchild just out of college and still in their early years of building retirement savings.

This article is intended to provide a brief overview of Section 529 & SECURE 2.0 Act. It is not a substitute for speaking with one of our expert advisors. For more information, please contact our office below.