The sole purpose is to enable 529 plan account holders to apply leftover funds toward retirement.
The annual transfer limit equals the IRA contribution limit for the beneficiary, with a lifetime maximum of $35,000 per beneficiary.Īnother important caveat about this SECURE 2.0 change is that it cannot be used to circumvent existing Roth IRA contribution limits. Contributions to the 529 plan within five years of a rollover are ineligible. To be eligible, the 529 plan must have been open for at least 15 years. To ensure the rollover provision is not misused, Congress has instituted several limits and restrictions. Assuming the annual IRA contribution limit is $6,500 and Kim has at least that much earned income, her parents could transfer $6,500 from the 529 to her Roth IRA each year until the 529 account is empty or lifetime limit reached. Kim needs to have earned income in order to contribute to an IRA. This leaves $35,000 in unused funds, which Sam and Samantha can roll over into a Roth IRA for Kim. Kim has used $55,000 of the 529 plan for her bachelor’s degree. Over the years, they contributed $50,000 into the plan, which has grown in value by an additional $40,000. Sam and Samantha opened a 529 plan when their daughter Kim was born. Here is an example of how this could work: There may not be any alternate beneficiaries for single child households and postponing for future grandchildren may seem untenable.īeginning in 2024, SECURE 2.0 allows 529 owners to transfer unused funds to a Roth IRA in the beneficiary’s name. While funds can be transferred to alternate beneficiaries, this is often a less-than-ideal solution. As discussed above, nonqualified distributions are subject to tax and a penalty. The biggest risk of overinvesting in a 529 college savings plan is having leftover funds when the beneficiary finishes their education. In addition, some states may require a recapture of deductions previously allowed and impose other penalties for nonqualified distributions.Įxceptions to the 10% penalty for nonqualified distributions include receipt of scholarships, education tax credits, military academy, death, disability, and return of excess distributions. Nonqualified distributions are subject to tax and a 10% federal penalty on the earnings portion. 529 distributions rules pro#
Lifetime limit of $10,000, per beneficiaryĭistributions are made on a pro rata basis between contributions and earnings. Unlimited if beneficiary is at least a half-time student Limited to $10,000 per year, per beneficiary Qualified 529 plan provisions include the following: Expense type In many ways, the rules for 529 plans mirror those for Roth IRAs. Once the 529 plan is funded, earnings will accumulate on a tax-deferred basis, and distributions for qualified expenses are permitted tax-free. Almost all states offer a 529 plan, with some states providing state income-tax credits, while others offer state income-tax deductions.
Investors are allowed to contribute large amounts of money to 529 college savings plans and ABLE plans, which provide compelling advantages over traditional savings accounts. Achieving a Better Life Experience (ABLE) Act of 2014 created a way for individuals with qualifying disabilities to open a savings account for current and future expenses in a tax-advantaged way. In addition, SECURE 2.0 gives more individuals with disabilities the chance to save for their future through a 529 ABLE account.Ī staple for almost 25 years, 529 college savings plans allow families to save for their children’s or grandchildren’s education. Among its lesser-known provisions, SECURE 2.0 allows investors who opened a 529 college savings plan at least 15 years ago to roll over a limited amount of their unused 529 account balance into a Roth IRA without incurring a penalty.
Passed into law in late December 2022, the SECURE 2.0 Act has changed many of the rules concerning retirement plan design, required minimum distributions, and penalty-free withdrawals.
0 kommentar(er)
