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Maximizing Your 529 College Savings Plan: Navigating SECURE Act 2.0 Changes

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As the Back-to-School season unfolds, it's an opportune moment to explore the transformative alterations made to 529 College Savings Plans by the SECURE Act 2.0.These plans have long stood as an invaluable resource for parents and guardians seeking to harness the power of tax-free growth while funding qualified education expenses for their beneficiaries. However, the lingering question has always been: What happens to the funds if the account retains a surplus due to scholarships, grants, or overfunding?

Before the SECURE Act 2.0, there were a couple of pathways available for handling unneeded funds within a 529 plan. One option involved taking a non-qualified distribution from the account. However, this approach not only subjected the withdrawn amount to taxes but also imposed a hefty 10% penalty. Another avenue was to rename only the beneficiary of the account to a qualified family member of the original beneficiary, encompassing an array of relationships from spouses and children to extended family members.

With the implementation of the SECURE Act 2.0, a third and innovative avenue has emerged for individuals grappling with remaining balances in their 529 plans. As of 2024, for those whose 529 plans have been active for a minimum of 15 years, the opportunity arises to utilize up to $35,000 to contribute to a Roth IRA in the beneficiary's name, without being restricted by earning limits. This new rule opens up a wealth of possibilities, albeit with a few essential conditions to navigate.

Here's what you need to know to make the most of this revolutionary change:

  • 1. Beneficiary's Earned Income: To tap into this strategy, the beneficiary must have earned

  • income equivalent to at least the amount you intend to transfer to the Roth IRA.

  • 2. Annual Contribution Limit: Currently set at $6,500 for the year 2023, this limitation governs

  • the extent to which you can convert funds into the Roth IRA.

  • 3. Account Duration Requirement: The contributions and earnings earmarked for the Roth IRA

  • conversion must have been within the 529 account for a minimum of five years.

For many years, 529 plans have been the go-to method for building a college fund for your children. However, the question of what to do with any surplus funds has always loomed.  These new changes present an unprecedented avenue for optimizing your 529 plan's impact. Not only can you foster your child's educational pursuits, but you can also potentially set them on a path towards securing a solid retirement foundation.