Biggest Risks and Threats Facing Businesses in 2023
01/27/23
Our Favorite International Stock Funds in 2023
02/16/23
How You Can Transfer Unused 529 Funds to a Roth IRA
The SECURE Act 2.0, signed into law on January 1, 2023, includes a provision that allows individuals to use unused funds from their 529 college savings plans and transfer them to a Roth IRA. This new provision, commencing in 2024, offers several benefits to those who are saving for retirement or already retired.
One major benefit of this provision is the ability to access funds for other purposes beyond paying for college. Prior to the SECURE Act 2.0, 529 funds could only be used for qualified higher education expenses, such as tuition, fees, and certain room and board costs. With the new provision, individuals can use their unused 529 funds to help save for retirement, even if they have already completed their higher education. It is important to note the Act limits 529-to-Roth transfers to a maximum of $35,000 per beneficiary over an individual’s lifetime.
Another benefit of the provision is the potential for tax savings. Contributions to a Roth IRA are made on an after-tax basis, meaning that the contributions are not tax-deductible. However, qualified withdrawals from a Roth IRA, including any earnings, are tax-free. This means that by transferring unused 529 funds to a Roth IRA, individuals may be able to benefit from tax-free growth and tax-free withdrawals in retirement.
Additionally, the provision allows for greater flexibility in retirement planning. Rather than being limited to the investment options offered in a 529 plan, individuals can choose from a wider range of investments when transferring their funds to a Roth IRA. This can potentially lead to a more diverse and potentially more successful retirement investment portfolio.
In order to take advantage of this new provision, there are requirements that must be satisfied in order to be eligible/participate. See below for a list of a few of the requirements:
- The beneficiary must have earned income
- The 529 plan must have been maintained for at least 15 years
- Subject to IRA contribution limit, less any ‘regular’ traditional IRA or Roth IRA contributions, annually
- Any contributions to the 529 plan within the last five years are ineligible to be moved to the Roth IRA
In summary, the SECURE Act 2.0 provision allowing for the transfer of unused 529 funds to a Roth IRA offers several benefits, including the ability to access these funds for purposes beyond just paying for college, the potential for tax savings, and greater flexibility in retirement planning. This provision can be a useful tool for those who are saving for retirement or already retired and may help individuals to better prepare for their financial future.
Expressions of opinion are as of this date and are subject to change without notice. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold, or sell any security. There are limitations associated with the use of any method of securities analysis. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Every investor's situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk, and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct. Dividends are not guaranteed and must be approved by the company Board of Directors. Indices are included for informational purposes only; investors cannot invest directly in any index. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Blue Chip Partners, Inc. we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Photo Credit: Luis Alvarez via Getty Images.
