New 529 Education Savings Plan Rules for 2024
A 529 education savings plan is a tax-advantaged plan that allows you to save for future education costs. The funds can be used to pay for qualified expenses from kindergarten through graduate school and apprenticeship programs. 529 plans grow tax-deferred, and withdrawals are tax-free so long as they are used for qualified expenses. And now, thanks to some new rules that went into effect in 2024, you may be able to transfer funds from your 529 plan to a Roth IRA.
What You Need to Know
Some 529 accounts can now be transferred tax-free to a Roth IRA for the 529 beneficiary in a direct trustee-to-trustee transfer.
- Ownership: The 529 plan beneficiary must also be the Roth IRA owner.
- Holding Period: To qualify, the 529 must be open for at least 15 years with the same beneficiary. Any 529 contributions made within the prior 5 years are ineligible for the transfer.
- Contribution Limits: Beneficiaries have a $35,000 lifetime cap as well as annual limits. Annual contributions to the Roth IRA cannot exceed the annual pay-in limit for Roth IRAs, which is indexed every year. The 2024 amount is $7,000.
- For example, if $2,000 is contributed by the 529 plan beneficiary to their own Roth IRA, the maximum that the 529 plan can contribute is $5,000, so as not to exceed the annual limit of $7,000.
- Income Limits: There are also income limits for Roth IRA contributions.
- The maximum Roth IRA contribution is the lesser of earned income or $7,000 in 2024. For instance, if a 529 plan beneficiary earns $5,000 in 2024, that is maximum amount that can be contributed to the Roth IRA.
- The ability to make Roth contributions phases out if income is too high. Depending on the income level, a contribution could be allowed but a calculation would need to be made to determine the exact amount. If one’s income is above these amounts, no Roth IRA contribution is allowed. The income limit phase-outs are as follows:
- Joint Filers $230,000-$240,000.
- Single and Head of Household Filers $146,000-$161,000
- Married Filing Separate $0-$10,000
- For example, if a 529 beneficiary files Single and has income of $150,000 in 2024, they can still contribute to a Roth, but the calculation would specify how much. $150,000-$146,000 = $4,000. $161,000-$146,000 = $15,000. $4,000/$15,000 = 26.6667%. Disallowed portion 26.6667% of $7,000 is $1,866.67. Therefore, maximum allowed in 2024 is $5,133.
- Some Ambiguity: As this is a new tax rule, created by SECURE 2.0 tax law, signed in late 2022 and set to start January 1, 2024, some guidance is still needed from Congress. For example, how specifically are they calculating the 15-years that the plan was open if beneficiaries have been changed or the plan funds have moved from one state’s plan to another state’s plan during those 15-years?
- State Implications: Not all states conform to the new IRS rules and instead have their own rules for taxation of 529 distributions. As this is so new, some states are also still determining how to handle this. In NY, for example, you can do a trustee-to-trustee transfer from your 529 to your Roth IRA, but it is deemed a nonqualified withdrawal that requires the recapture of any NYS tax benefits that had accrued on contributions. It is best to check with your financial advisor, accountant, or plan administrator to find out what may apply to your specific situation.
If you have a 529 plan and would like to see if you qualify to make Roth contributions, you should contact your plan’s administrator to verify that your account meets the appropriate criteria. It can also be helpful to reach out to your 529 plan beneficiary to determine if their level of income qualifies, and if they are contributing to a Roth as well. If you would like more information, please contact us.
