Secure 2.0 Act: Americans will be able to make tax-free transfers of 529 plan funds to Roth IRAs

Americans saving in a 529 college savings plan will soon be able to transfer unused 529 plan funds into a Roth IRA in the same beneficiary’s name, without incurring income taxes or tax penalties on the rollover. 

Beginning in 2024, the Secure 2.0 Act will allow people to make tax- and penalty-free rollovers from 529 plans into a Roth IRA. To qualify for the transfer, the 529 plan must have been open for at least 15 years. Beneficiaries will be able to roll over a maximum of $35,000 over the course of their lifetime. 

Transfers will also count toward annual Roth IRA contribution limits. For 2023, the Roth IRA contribution limit is $6,500 or $7,500 for those ages 50 and over. However, contributions to a 529 plan made in the last five years aren’t eligible for tax-free transfers to a Roth IRA.

529 plans are savings accounts designed to help people save for educational expenses. Money in a 529 plan grows tax-free and allows for tax-free withdrawals for educational expenses such as tuition and books required for classes. Individuals can withdraw the money to cover other expenses, however, it would trigger income taxes and a 10% penalty. Before the 529 plan provision in the Secure 2.0 Act takes effect, withdrawing money from a 529 plan to transfer into a Roth IRA would count as a non-qualified withdrawal. 

"Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education," the official summary of the Secure 2.0 Act said. "They should be able to retain their savings and begin their retirement account on a positive note."

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What is a Roth IRA?

A Roth IRA is a retirement savings account that offers distinct tax benefits. Contributions and earnings grow tax-free in a Roth IRA. And account holders can make qualified tax-free withdrawals as long as they are at least 59.5 years old and their accounts have been open for at least five years. 

But unlike a traditional IRA, Roth IRAs don’t allow for tax-deductible contributions. To be eligible to contribute to a Roth IRA in 2023, one's modified adjusted gross income (MAGI) must be less than $153,000 if you file single and $228,000 if you file jointly. Individuals' contribution limits to a Roth IRA in 2023 decreases once MAGI reaches $138,000 if they’re filing single and $218,000 if they’re filing jointly.

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SECURE 2.0 ACT WILL REQUIRE COMPANIES TO AUTO ENROLL WORKERS INTO 401(K) PLANS

What is the Secure 2.0 Act

Signed into law at the end of 2022, the Secure 2.0 Act makes several key changes when it comes to retirement savings.

Here are some highlights to Secure 2.0 including provisions set to go into effect within the coming years. 

• Beginning in 2025, companies will be required to auto-enroll their eligible employees into 401(k)s.
• Catch-up contributions toward workplace retirement plans like 401(k)s will increase to $10,000 for employees between the ages of 60 through 63, beginning in 2025
• The required minimum distribution (RMD) age will increase to 73 this year and then to 75 in 2033.
• Part-time employees who have worked for at least two consecutive years with at least 500 hours of annual service will be eligible to enroll in their employer’s 401(k) plans.
• Beginning in 2024, plan sponsors of individual accounts can create "emergency savings accounts" that allow non-highly compensated employees to make Roth after-tax contributions to a special savings account within the retirement plan.

The Secure 2.0 Act is part of the $1.7 trillion omnibus spending package that was signed into law at the end of 2022. It is a follow-up to the 2019 Secure Act. 

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