Effective Jan. 1, 2024, investors with unused dollars in certain 529 college-savings plans can roll their remaining balances into tax-free Roth IRAs for the benefit of those plans’ named beneficiaries without risk of penalties or income-tax exposure. Moreover, investments in Roth IRAs may continue to grow free of tax for beneficiaries to withdraw in retirement tax-free.
Contributions to 529 saving plans grow tax-deferred until beneficiary children reach college age. At that point, plan withdraws are tax-free when used to pay for higher education expenses, including tuition, books, computers and room and board. Families may also withdraw up to $10,000 per year to pay for a child’s primary and secondary school education at a religious or private school. Historically, any funds remaining in a 529 saving plan that could not be used for qualifying education expenses were subject to ordinary income tax and a 10 percent penalty upon withdrawal. This could occur when children do not go to college, they attend a college that costs less than expected, or they receive scholarship funds to pay a portion of their higher education costs.
With the passage of the Secure Act 2.0, families have more choices beginning in 2024. 529 plan beneficiaries now can roll over up to $35,000 of unallocated 529 savings into a Roth IRA for their benefit without penalties or tax implications. Not only do these rollovers escape the usual income limits of Roth IRA contributions, but they also give children a head start on their retirement savings. To qualify for the 529 plan rollover, the following criteria must be met:
Consider that once children gain employment, they are likely to have access to an employer’s retirement savings plan, for which they can contribute up to $23,000 in 2023 and yield tax-deferred savings while also qualifying for a potential employee match. Throughout the children’s careers, they may continue to max out their 401(k) savings and eventually convert those plans into Roth IRAs (and pay any related taxes at the time of conversion) to enjoy tax-free withdrawals in retirement.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC (PWAS). He can be reached in the firm’s West Palm Beach, Fla., office at (561) 361-2001 or info@provwealth.com.
Provenance Wealth Advisors, 200 E. Las Olas Blvd., Nineteenth Floor, Ft. Lauderdale, FL 33301Â (954) 712-8888.
Brendan T. Hayes is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
 This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the preceding material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
 Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.
 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
 Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Changes in tax laws may occur at any time and could have a substantial impact on each person’s situation.
 This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
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Updated on April 10, 2024