The recent SECURE 2.0 Act enacted by Congress has introduced a series of new strategies to help reduce burdens on taxpayers. CGA Law Firm has previously reviewed the SECURE 2.0 Act in general and highlighted some of its advantages to taxpayers. Today we will highlight a beneficial move that can help you and your college-bound children or grandchildren benefit more from their dollars. 

Utilizing a 529 Plan – a tax-advantaged college savings plan under IRC Section 529 – has long been a solid strategy for tax avoidance. A donor can set up a plan for college-bound family members, usually depositing up to the federal estate tax annual exclusion amount (currently $17,000) into the account. Each separate donor can make up to a $17,000 payment into an account so that a married couple could deposit $34,000 into every grandchild’s plan. Those funds accrue tax-free and can be withdrawn for tuition or college expenses such as room/board and textbooks. Recently, 529 Plans have also been expanded to cover K-12 educational expenses. Such a plan benefits the donor, who saves on taxes, and the student, who has expanded resources for their educational needs. 

But what happens to the 529 Plan funds if the student decides against college or receives scholarships to leave some or all of the Plan funds unspent? Previously such funds might be transferred to some eligible college-bound family member (if one can be found) or might be withdrawn for non-qualified purposes and subject to tax and penalty. SECURE 2.0, however, adds a new beneficial twist to the 529 Plan strategy. Under SECURE 2.0, the remaining Plan funds can be converted to a Roth IRA for the student, allowing the transferred amount to benefit the student as a tax-deferred Roth IRA.

To successfully transition a 529 Plan to a Roth IRA, the donor must be age 59 ½, and the Plan must have been maintained for at least 15 years and not include any amount aged at least five years. Also, the transfer must be done as a direct conversion from the 529 to the Roth IRA and is subject to the regular IRA contribution limits. Therefore the conversions will be limited to $6,500 per year (beginning in 2024, when this provision becomes effective), and the entire conversion amount may not exceed $35,000. Any excess contributions will not qualify and will be subject to tax. 

Individuals can only place their earnings from a job to fund a Roth IRA into the account. A 529 Plan is a potential strategy to avoid this limitation while benefiting one’s family and providing for the future. With these new advantages, 529 Plans have never looked so good. If you have questions or want to discuss these matters further, please contact CGA Law Firm’s Estate Planning Practice Group to learn more about the benefits of transitioning from a 529 Plan to a Roth IRA.

Timothy J. Bupp

Estate Law Chair | Shareholder | Attorney

Timothy J. Bupp is a Shareholder with CGA Law Firm and chairs the Firm’s Estate Law Section. He provides clients with specialized advice in Estate Planning, Business and tax planning, Real Estate transactions and related matters. Tim assists his clients by utilizing the knowledge he gained from his advanced degrees in business administration, business taxation, and law, as well as his certifications in estate planning and employee benefits taxation. He counsels individuals and businesses with estate and wealth transfer planning, business succession planning, entity formation or acquisition, and tax planning. 

Attorney Bupp has earned the designation of Certified Elder Law Attorney from the National Elder Law Foundation, the only ABA-approved Elder Law certification approved by the Pennsylvania Supreme Court.

Read Tim’s Bio Page in full HERE.

Nicole Marzzacco

Law Clerk