Changes to 529 Plans in the SECURE 2.0 Act
The SECURE Act was initially passed by Congress at the end of 2019 and was intended to improve retirement savings opportunities. It was a big deal at the time and the most significant piece of retirement legislation since the 2006 Pension Protection Act.
Congress came together to pass SECURE 2.0 at the end of 2022 to build on this popular legislation and clarify some of its provisions.
The SECURE 2.0 Act includes 92 new provisions designed to promote savings, add incentives for businesses to offer retirement plans to their employees, and provide more overall flexibility to those saving for retirement.1
While increasing the starting age for required minimum distributions to 73 made the headlines, another important change for those saving for college was the addition of an option to move the unused portion of a 529 plan to a Roth IRA. But several criteria are involved in this process, and eligibility requirements must be met.
A 529 plan is an education savings account that allows parents, grandparents, other relatives, or friends to save money that will be used for a child's education.
These investment accounts became mainstream in the mid-1990s as a way for people to save for future education expenses when the assets would be used to pay for qualified education expenses for a designated beneficiary. Originally geared exclusively to pay for college, 529s have been expanded to pay for K –12, private and religious schools, trade schools, graduate programs, and some international institutions.
A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. The state tax treatment of 529 plans is only one factor to consider before committing to a savings plan. Also, consider the fees and expenses associated with a particular plan. Whether a state tax deduction is available will depend on your state of residence. State tax laws and treatment may vary. State tax laws may differ from federal tax laws. Earnings on non-qualified distributions will be subject to income tax and a 10% federal penalty tax.
529 Plans Explained
With a 529, after-tax contributions are invested in an account that can be used to pay for qualified education expenses. For example:
- Housing—Campus housing expenses, including college room and board fees, can be paid through 529 distributions. Off-campus housing rentals qualify up to the cost of room and board on campus.
- Books and Supplies—Paper, pens, and textbooks required by a specific course are qualified expenses. Schools set budget limits for books and supplies.
- Needs and Services—Special needs equipment and services qualify for 529 distributions. Students using mobility equipment may be eligible for 529 distribution purchases. Depending on the circumstances, other modes of transportation may also apply.
Also, keep in mind that a 529 plan account holder may qualify for a state tax benefit, depending on where they live. More than 30 states and the District of Columbia offer some type of tax deductions or tax credits for 529 plan contributions.2
Under the old rules, any leftover funds in a 529 plan after the designated student graduates or leaves college would be subject to a tax penalty and a withdrawal penalty if the remaining assets were liquidated for non-qualified expenses. However, the owner was allowed to transfer the 529 plan to another beneficiary, who could use it for their education expenses.3
SECURE 2.0 Act Changes for 529s
The new rule, which goes into effect in 2024, allows a 529 account holder to move money to a Roth IRA account under certain conditions. The main benefit of this new rule is that it removes some of the uncertainty regarding whether your kids will need the 529 money or whether you may have overfunded the account.
To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a five-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.
Moving a 529 to a Roth IRA4
- This part of the SECURE 2.0 Act becomes effective after December 31, 2023.
- The 529 plan must have been open for a minimum of 15 years.
- Changing beneficiaries to another student may restart the 15-year clock.
- The owner of the Roth IRA must be the beneficiary of the 529 plan (meaning the student).
- Any money moved from a 529 plan into a Roth IRA account will be subject to the Roth IRA annual contribution limits. The Roth IRA contribution limit in 2024 is scheduled to be $6,500, with an extra $1,000 allowed for individuals over age 50.
- The lifetime limit is $35,000.
This article is for informational purposes only and is not a replacement for real-life advice. There are some additional criteria that go along with the updated rules, so it's best to speak to a financial or tax professional who has a detailed understanding of the state plan you are considering.
Paying for College
In 2021, the average cost for a year of college, including tuition, fees, room, board, and other expenses, was $35,551. That's about $142,000 for a four-year degree.5
Footing the higher education bills of your children or grandchildren may seem daunting, but it can be within reach with the right type of preparation.
The SECURE 2.0 Act significantly changes 529 plans, offering more flexibility and choices for families saving for education. We have helped many clients create college savings strategies for their children and grandchildren. It's a specialty of ours, and it's one of the more rewarding aspects of the services we provide.
If you're considering a 529 plan, we may be able to help. Our professionals can provide more detailed information about 529 plans and offer guidance and insight into the state plan you are considering. We look forward to hearing from you.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This
information is found in the issuer's official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s
529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult
their financial or tax advisor before investment in any state's 529 Plan.
1 AM.JPMorgan.com, January 3, 2023
2 SavingForCollege.com, May 11, 2023
3 SavingForCollege.com, April 19, 2023
4 SavingForCollege.com, December 24, 2022
5 BestColleges.com, April 11, 2023