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March 06, 2024 at 11:41 AM
What You Need to Know
- The jury is still out on how beneficial the Secure 2.0 Act's 529-to-Roth IRA transfer option will be.
- Planners are still awaiting IRS guidance on how, exactly, the rules will apply.
- There are often more effective vehicles for college savings, an advisor says.
While the jury is still out on how beneficial the Secure 2.0 Act’s 529-to-Roth IRA transfer option will be, advisors have their own strategies when helping clients decide how to best plan for college — and they don’t always include 529 plans.
Starting this year, 529 account owners can do tax-free rollovers of unused 529 funds to a Roth IRA. The rollovers are subject to annual Roth IRA contribution limits, up to a lifetime total of $35,000.
However, the new rollover has several restrictions, one of which is that the 529 plan must have been open for more than 15 years.
Open Questions
The Internal Revenue Service has yet to clarify how the limits on IRA-to-Roth rollovers will apply in practice.
For example, it is unclear whether ”a fresh 15-year waiting period is required when someone changes 529 plan beneficiaries,” Ed Slott told ThinkAdvisor in a previous interview.
This question could be important to clients who want to open an account before a child is born, said David Wilson, managing partner at Sincerus Advisory in New York. As he explains, a client can open a 529 plan in their own name and change the beneficiary later. This enables them to “maximize the tax-free growth and benefit from the state tax deduction,” he says.
Advisors Weigh In
Wilson was one of several advisors who responded to a ThinkAdvisor request, via the Financial Planning Association, about the Secure 2.0 change as well as how they advise clients on college planning.
While the “greater flexibility and options around savings and increased capacity to fund tax-free Roth IRA is always incrementally helpful,” it’s unclear how beneficial 529-to-Roth rollovers will be, Wilson said.
“In general, with our clients we don’t see a significant amount of excess funds in 529 accounts post college graduation given the relentless pace of higher education inflation over the last couple of decades,” he added.
Another reason Sincerus doesn’t regularly see excess 529 plan amounts “is that our strategic plans tend to target saving 80-90% of higher education costs with the remaining amounts being funded by cash flow or by the students themselves so that they have ‘skin in the game,’” Wilson said.
