New Tax Law Change on 529 Plans - Significant Tax Planning Opportunity

By Scott Hennessy On November 28, 2023
Scott is a CPA & Manager at BSB.

529 Plan Advantages & Rule Change​

529 Plan = Tax-advantaged higher education savings account

  • Contribute up to $17k/year with no gift tax per beneficiary​
  • NYS tax deduction up to $5k/yr total contributor​
  • Funds grow tax-free​
  • Distributions used for higher education are tax-free

Changes under SECURE 2.0 Tax Act

  • Prior Rule: unused funds would be subject to tax and 10% penalty​
  • New Rule: – up to a maximum of $35,000 of these unused funds can be rolled into a Roth IRA tax and penalty free
    • This creates a significant retirement planning opportunity

1. Contribute $2.5k/yr to 529 Plan

2. In 15 years - 529 Plan balance is $35k ​

3. Start converting 529 Plan to Roth IRA over the next 5-6 years

4. A Roth IRA of $35k at the age of 25 would be worth $1.1M at the age of 65... Completely tax-free ​

The Rules​

  • Beneficiary must be same for both accounts
  • Holding Period - The 529 plan must have been open for at least 15 years​
  • Maximum Lifetime limit - $35,000 per beneficiary in total can be transferred​
  • Annual Contribution Limits Apply – Can only transfer the annual IRA Roth limit each year​
    • Beneficiary must have earned income ​
    • Current annual limit is $6,500 so it would take 6 six years of contributions to reach $35k limit​
    • ! Income limits that normally apply to Roth contributions do not apply here!​
  • Waiting Period - Contributions to the 529 within the last 5 years and earnings attributable to those contributions are ineligible for transfer ​

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