The SECURE Act 2.0 made a significant change to 529 education savings plan accounts. It created a new incentive to use them because it makes funds in the accounts easier to access. Beneficiaries will ultimately be able to take tax free distributions from 529 plan accounts – even if the money is not used for education. But first, the assets must be converted to a Roth IRA.
What SECURE Act 2.0 Changed
The SECURE Act 2.0 builds on the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which changed many retirement savings rules. The SECURE Act 2.0 included specific changes to 529 plan accounts.
These changes go into effect in 2024 and provide 529 plan beneficiaries with a clear path to tax- and penalty-free withdrawals from those accounts. They also make it possible for 529 plan accounts to be used for retirement planning.
The SECURE Act 2.0 addresses three practical questions for beneficiaries of 529 plan accounts:
- How funds can be used
- How funds can be accessed
- When funds can be accessed
How 529 Plan Funds can be Used
Since their beginning, 529 plan accounts have helped people earn tax-free returns on amounts saved to pay qualified education expenses. That hasn’t changed.
What changes is the opportunity to use a 529 plan account to finance a beneficiary’s retirement. The law makes it possible to convert a 529 plan account to a retirement account. This is the case if:
- funds remain after an account has been used to finance a beneficiary’s education
- funds in an account had never been used to pay education expenses
How 529 Plan Funds can be Accessed
Access to funds in a 529 plan account is available after the 529 plan account owner takes specific steps.
The first step is that distributions from a 529 plan account must be transferred directly into a Roth IRA owned by the 529 plan account beneficiary.1
The second is that those distributions cannot exceed the applicable annual IRA contribution limit (aggregating all accounts) for that beneficiary in any given year. So large balances in a 529 plan may have to be transferred to a Roth IRA in stages.
The SECURE Act 2.0 also caps the total amount that can be transferred from a 529 plan account into a Roth IRA. The lifetime limit is $35,000.
When 529 Plan Funds can be Accessed
Assets may be transferred to a Roth IRA only from 529 plan accounts that have been in existence at least 15 years.
Funds may only be transferred five years after being contributed to (or earned in) a 529 plan account. As such, the account owner needs to keep track of the timing and amount of contributions and earnings.
Benefits for 529 Plan Owners and Beneficiaries
The SECURE Act 2.0 doesn’t change any of the benefits of 529 plan accounts. It helps expand their usefulness. A 529 plan account may ultimately be used to finance objectives beyond education.
This is because:
- Transfers to a Roth IRA are tax and penalty free
- Assets in a Roth IRA grow tax free
- Transfers from a 529 plan to a Roth IRA can be withdrawn immediately
- Withdrawals from a Roth IRA are tax and penalty free
The SECURE Act 2.0 helps to remove many of the obstacles that lead people to delay or decline funding education savings plan accounts. It may actually help families pay for their loved one’s educations while also contributing to their retirement savings.
Working with experienced financial professionals can help you stay the course. They can provide guidance and encouragement to help focus your attention on your long-term goals.
1Consolidated Appropriations Act, 2023, Section 126