The SECURE Act 2.0 allows a 529 plan rollover to a Roth IRA

The SECURE Act 2.0 created an exciting new option for people who invested more than they needed in 529 college saving plans: some of those funds can be used for retirement savings.

Beginning in 2024, beneficiaries of 529 accounts will have the option to roll over up to $35,000 over the course of their lifetime to their Roth IRA. Rollovers are subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years. This change helps reduce the risk of overinvesting in a 529 plan. Read on for additional details and rules about this change that will take effect in 2024.

A 529 plan is an education savings account that allows parents, other relatives, friends or anyone to save money that will be used for a child's future education. Any money placed in the account must be used for qualifying educational expenses.

In the past, if you didn't use the funds for education and instead withdrew them, you paid income tax as well as a 10% penalty. Additionally, under the old rules, if the beneficiary did not use the funds for qualifying education costs, the only way to avoid the withdrawal penalty was to transfer them to another beneficiary within the family, such as another child or even a parent, who could use it for their education expenses.

Beginning in 2024, the federal legislation known as the SECURE Act 2.0 gives a 529 plan beneficiary the ability to transfer 529 plan funds into their own Roth IRA without paying taxes or penalties.

Eligibility & criteria:

• The 529 plan must have been open for a minimum of 15 years.
• The owner of the Roth IRA must be the beneficiary of the 529 plan.
• The rollover is subject to the requirement that a Roth IRA owner have includible compensation at least equal to the amount of the rollover.
• Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer.
• Transfers you make from a 529 to a Roth IRA count against your yearly Roth IRA contribution caps, which are currently at $6,500.
• The lifetime limit for rollovers is $35,000.

The new law provides a way for you to save money in a 529 education plan without having to worry about incurring penalties or income tax in the event the money isn't used for education.

Consider talking with a Thrivent financial advisor to learn how best to plan for education costs and retirement.