529 Plan Rollovers to ROTH IRA

The SECURE Act 2.0 passed as part of the budget bill in December allows unused funds in a Section 529 Plan to be rolled over into a ROTH IRA. We go over the details.

SECURE Act 2.0 passed as part of the budget bill in December has a new provision that allows farmers who have Section 529 plans for their kids or grandkids the option to roll over any excess funds into a ROTH IRA for that child or grandchild.

Section 529 plans allow for tax-free growth as long as the proceeds from the plan are used for college education. However, many times, there are excess unused funds in the plan after the child graduates. This could be due to scholarships, a cheaper college education or many other reasons.

Under prior law, the owner of the account could transfer excess funds to other kids for their benefit, but not much else could be done.

SECURE 2.0 now allows the owner to transfer funds from the Section 529 to a ROTH IRA for the benefit of that child. The amount that can be transferred each year is limited to the annual ROTH IRA contribution limit (currently $6,500 indexed to inflation). The maximum lifetime limit is $35,000.

The Section 529 plan must also be open for at least 15 years and any contributions and earnings in the previous five years is not allowed to be rolled over.

Older creative farmers may purposely set up a Section 529 for their very young grandchildren and fund it fairly aggressively with the intent that $35,000 will not be used for college and instead be allowed to fund their grandchildren’s ROTH IRA during their 20s. This becomes another example of a super backdoor ROTH.

Here is an example:

Ed and Mary have 10 grandchildren who are all under age 10. Ed and Mary fund 10 Section 529 plans with $34,000 each in 2023 (the annual gift tax exclusion). They then fund the same amount for the next couple of years. These funds should enable each child to attend college and have excess funds of $35,000 in each Section 529 plan. 15 years after setting up the 529 plan, Ed and Mary start rolling over funds into the ROTH IRA for each child.

However, we don’t have IRS regulations on this provision yet, so some restrictions may be placed on this option. We will keep you posted.