New In 2024 - A More Flexible 529 Plan

If you have children or grandchildren, you likely wonder about the future price of a college education.  A 529 plan is a tax-efficient way to help with those costs. Beginning in 2024, a new feature makes a 529 plan an even more flexible and powerful tool.  

Let’s say the plan money is not ultimately needed for education, or the plan is overfunded. After all, it may be that the beneficiary is granted a scholarship, or decides that higher education is not the right path.   What then?  Yes, there are provisions that allow for the funds to be used for college costs of a sibling or a cousin, but that may not be your preference.  

New provisions became effective in 2024 allowing for unused 529 plan funds to be contributed to a Roth IRA for the beneficiary.  If not needed for college costs, it’s a great way to start a savings plan for a young adult - right?  

Yes it is, but there are two key requirements relating to this:

1. The amount that can be used to fund the Roth for the beneficiary is limited to a lifetime amount of $35,000.   In any one year, only the annual limit amount for IRAs can be transferred – eg $7000 in 2024.   Also, the beneficiary must have earned income in the amount of the contribution, much like the IRA requirements.
2. The 529 account needs to have been in existence for at least 15 years, and only the contributions and earnings that were in the account more than 5 years prior will qualify.  This restriction is to eliminate the possibility that a 529 is created and funded with the intention of utilizing it to fund a Roth account, rather than for educational purposes.  It’s OK if you overestimate what will be needed for college, but the purpose of setting up the 529 should be to save for college, not to fund a retirement account.  
        
   Not only should you be aware of this requirement, but it certainly motivates you to set up the account as early as possible so the clock is started on 15 year period.  Even if you begin with a modest amount of money, having the account established as early as possible is helpful.  

Please remember to check with your tax advisor, as there are plenty of details that you will need to consider.  Also, you should check with the state in which the 529 is established to determine if it qualifies for the contribution to a Roth. Our home state of Louisiana does allow for this, and we believe many states do as well.   A 529 plan now becomes a little more powerful!

I have to smile at the relevance of this new provision. While I was putting my finishing touches on this blog, the Wall Street journal published “Your 529 College -Savings Plan Can Now Fund a Roth IRA”. The piece is so similar that I wondered if they had gotten into my notes! We see this as confirmation that this new provision is sparking good conversations. We love how this could make a 529 plan a little more powerful – perhaps even do a bit better of a job Bringing Together Money and Meaning.

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