As retirees, contributing to your grandchildren's future is often a significant part of your legacy planning. The SECURE 2.0 Act, coming into effect in 2024, introduces an innovative option that merges educational support with retirement savings. This new rule allows the transfer of unused funds from a 529 college savings plan to a Roth IRA, offering flexibility in how you can support your grandchildren's financial future.
Why There May Be Unused 529 Dollars
Before delving into the specifics of the rule, it's important to understand why there might be leftover funds in a 529 plan:
- Overfunding: It's not uncommon to save more than needed, especially when starting early and considering potential college cost increases.
- Scholarships: If your grandchild receives scholarships, the need for funds from the 529 plan diminishes, potentially leaving a surplus.
- Cost-Efficient Educational Choices: Opting for less expensive colleges or educational paths can result in unused funds in the 529 plan.
- Alternate Career Paths: Some grandchildren may choose career paths that don't require a traditional college education, thus not utilizing the saved funds.
Key Features of the 529-to-Roth IRA Transfer Rule
- Lifetime Transfer Limit: The rule allows a $35,000 lifetime limit on transfers from a 529 plan to a Roth IRA. This is a per-beneficiary limit, so each grandchild would receive this benefit.
- Tax and Penalty-Free Rollovers: Transfers from a 529 plan to a Roth IRA are exempt from taxes and penalties, offering a financially efficient way to repurpose unused educational funds.
- No Income Limits for Rollovers: These rollovers are not subject to the income limits that apply to Roth IRA contributions, which is advantageous for grandchildren, especially those who are high earners.
- Account Age Requirement: The 529 plan must have been active for at least 15 years, ensuring its use for educational purposes before retirement savings. A good reason to start 529 savings sooner rather than later.
- Annual Contribution Limits: You won’t be able to transfer the full amount into a Roth in one year; the annual IRA limits will apply. The annual contribution limit for Roth IRAs will be $7,000 starting in 2024, making it feasible to transfer the full $35,000 from a 529 plan to a Roth IRA over five years.
Implications for Retirees and Their Grandchildren
This new rule provides a strategic approach for retirees to contribute to their grandchildren's education and retirement. It's part of broader legacy planning, ensuring your financial support adapts to their changing needs and decisions throughout their lives.
Conclusion
The 529-to-Roth IRA transfer rule is a versatile and tax-efficient strategy for retirees to extend their support from education to retirement savings. It reflects the evolving nature of educational and career paths, ensuring your contributions have a lasting and meaningful impact. This rule can play a significant role in your legacy, providing financial benefits across different life stages for your grandchildren.
