Tax-free rollovers of 529 plans for Roth IRAs allowed beginning in 2024

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Americans saving for college on 529 plans will soon have a way to redeem unused funds while keeping their tax benefits intact.

A $1.7 trillion government funding package has a clause that allows savers to roll money from 529 plans into individual Roth retirement accounts, free of income tax or tax penalties.

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The House passed the measure on Friday and the Senate on Thursday. The bill goes to President Biden, who is expected to sign it into law.

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The rollover measure — which takes effect in 2024 — has some limitations. Among the biggest: There’s a $35,000 lifetime limit on transfers.

“It’s a good provision for people who have [529 accounts] and the money was not used,” said Ed Slott, a certified public accountant and IRA specialist based in Rockville Center, New York.

This can happen if a beneficiary – such as a child or grandchild – does not attend a K-12 college, university, vocational or private school or other qualified institution, for example. Or, a student may receive scholarships that mean around 529 funds are left over.

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Some think it’s a handout for the rich

Limitations on transfers from 529 to IRA

While the new tax break mainly benefits wealthier families, there are “quite significant” limitations on rollovers that reduce the financial benefit, said Jeffrey Levine, a St. Louis-based certified financial planner and certified public accountant. tweet🇧🇷

Restrictions include:

  • A lifetime limit of $35,000 on transfers.
  • Rollovers are subject to the annual Roth IRA contribution limit. (The limit is $6,500 in 2023.)
  • The rollover can only be made to the beneficiary’s Roth IRA – not the account owner. (In other words, a 529 owned by a parent with the child as the beneficiary would need to be included in the child’s IRA, not the parent’s.)
  • The 529 account must have been open for at least 15 years. (It looks like changing account beneficiaries could reset the 15-year clock, Levine said.)
  • Account holders cannot roll over contributions or income from those contributions made within the last five years.

In a summary document, the Senate Finance Committee said current 529 tax rules “have led to hesitation, delay or denial of funding for 529s at levels necessary to pay for rising education costs.”

“Families who sacrifice and save in 529 accounts should not be punished with taxes and fines years later if the beneficiary has found an alternative way to pay for their education,” he said.

Are 529 plans flexible enough yet?

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