A 529 plan is one of the best generational wealth transfer vehicles. Instead of just giving our kids or grandchildren money, it's way better to give them the gift of education. Thanks to the SECURE Act 2.0, we will be able to roll over leftover 529 funds to a Roth IRA without taxes or penalties.
As a parent, it was rational to feel hesitant about funding a 529 plan or contributing too much. With restrictions in place on how the plan's money could be spent, parents rationally hedged the way they saved for a college education.
In fact, one of the main questions that has come out of my 529 savings guide by age post is whether to contribute to a Roth IRA or a 529 plan to pay for college. Contributing to both plans, if you are eligible, is a smart move.
In the past, the only real option for 529 funds that were not used for some kind of secondary education program was to roll the money over to another beneficiary, either for school expenses or to repay student loans.
Thanks to the SECURE Act 2.0, the 529 plan becomes more valuable due to the Roth IRA conversion option. Here are the details.
Rules For Converting Leftover 529 Funds Into A Roth IRA
The government has created strict rules and limits for converting leftover 529 funds into a Roth IRA. After all, the government still wants to earn as much money from its citizens as possible.
1) Rollovers can begin in 2024. Anything can happen between now and 2024, so stay on top of the latest rules. I'll certainly be updating the date if anything changes.
2) Same beneficiaries. You can't roll over leftover 529 funds to a different Roth IRA beneficiary. This is a good thing as it protects the beneficiary. It also keeps the spirit of taking care of your loved ones alive.
3) Rollover amount is subject to the annual Roth IRA contribution limit. The annual contribution limit is $6,500 in 2023, or $7,500 if you are 50 or older. The Roth IRA contribution limit will likely go up in $500 increments every three-to-five years.
4) Lifetime conversion limit of $35,000. Although $35,000 seems relatively low, my bet is the lifetime conversion limit will increase with inflation over time. After all, college and private grade school tuition has historically inflated faster than inflation.
5) The 529 plan must be open for at least 15 years. For those of you who've been delaying opening a 529 plan, here's another reason to start now. You could even open one with a minimum amount of money and then superfund the 529 plan years later. It is unclear whether the 15-year time resets if you change beneficiaries.
The Value Of A 529 Plan Goes Up
The rules for converting leftover 529 funds into a Roth IRA will become clearer over time.
But the bottom line is the value of a 529 plan goes up. Therefore, the decision to contribute to a 529 plan or superfund a 529 plan also increases for all socioeconomic classes.
At the very least, open up a 529 plan with $1,000 to get the timer going for the 15-year age hurdle before rollovers are allowed. Then have a goal to grow the 529 to $35,000 or whatever the lifetime conversion limit is in the future.
This way, the beneficiary at least has some tax-advantaged funds to use for whatever they want in the future. One of my regrets was not contributing to a Roth IRA when I could. If I had for several years, I would have over $100,000 in my Roth IRA account today!
I won't make the same mistake with my children. Therefore, I've opened up custodial Roth IRA accounts for each. To be able to earn tax-free income below the standard deduction limit, contribute to a Roth IRA that grows tax-free, and then be able to withdraw funds tax-free is a no brainer.
When Rolling Over 529 Funds To A Roth IRA Doesn't Matter
Although the value of a 529 plan goes up with the new rules, there are two scenarios where being able to roll over leftover 529 funds really doesn't matter.
Scenario 1. If you plan to make your kids 529 plan millionaires, then being able to roll over leftover 529 funds is a benefit, but not a big deal. After all, the $35,000 Roth IRA rollover limit only equals 3.5% of $1 million.
Further, if you have the means to make your kids 529 plan millionaires, your kids are probably set no matter what. You've likely already set up a trust fund to provide financial insurance after college.
Scenario 2. If you don't anticipate a 529 plan will cover all secondary education expenses, being able to roll over leftover 529 funds also doesn't matter. You won't have any leftover funds to roll over!
Who Is Most Excited About The 529 Plan Rollover Benefit?
The only people truly excited about being able to roll over leftover 529 funds into a Roth IRA are:
- Meticulous middle-class planners who contribute the perfect amount to a 529 plan that covers all expenses plus the rollover limit leftover
- Meticulous middle-class planners who contribute the perfect amount to a 529 plan that covers all expenses, and whose kids end up earning grants to attend school equal to the rollover limit
- Parents who never planned to change 529 beneficiaries for generational wealth transfer purposes
- Politicians who may earn more votes and stay longer in power
- Financial planners, personal finance bloggers, and think tank researchers who have been encouraging more citizens to save more money
- Demographers who are concerned about fertility rates and what a decline in childbirths means for respective countries
The reality is, being able to roll over 529 funds to a Roth IRA is not a “game changer” as some make it seem. The new laws simply provide more mental relief to 529 plan contributors who wonder whether their money is going into a black hole or not.
I doubt most 529 plan balances are able to fully fund four years of college anyway. Even with these new 529 plan benefits, the government can always change its mind in the future.
Couples Who Want Children Are The Biggest Beneficiaries
One of the main reasons why my wife and I delayed having children until our late 30s was due to a lack of financial security. Living in New York and San Francisco is expensive!
Before age 35, I didn't feel like we had enough money or time to properly take care of children. Therefore, ironically, we waited until we no longer needed jobs to have children. When we finally decided we were ready to have children, our biology didn't cooperate for three years!
No wonder more people are deciding to have children later, fewer children, or not at all. The burden to find a suitable partner, find purpose at work, build enough wealth, and feel financially secure enough to have children is immense.
We have already seen a significant increase in loneliness. If more people felt more secure, maybe there would be more love and by extension, more babies.
I'm positive we would have had children sooner, and maybe one more child, if the cost of raising children was lower. At 17, I made a conscience choice to attend William & Mary because the in-state tuition was $2,800 versus $22,000 at Babson College.
In other words, plenty of middle-class parents and kids like me are thinking about the future at an early age. Making it easier to save for college may make parents less fearful of having children or more children.
Solutions To Increasing The Total Fertility Rate
If the government truly wants to increase fertility rates, then adding benefits to the 529 plan is one small step. A growing population is good for society because it creates more earnings, more tax revenue, and a stronger safety net for older generations.
Below is a fascinating chart showing the projected populations of China, India, Nigeria, the USA, and Japan.
Due to the one-child policy in China for decades, the country will likely go through a significant deceleration in growth over the coming decades. On the other side is Nigeria, which will likely see a boom in population growth over the next 80 years.
Hence, as someone who invests in long-term trends to get rich, investing in Nigeria and Africa is something we should all consider. AFK and NGE are two ETFs to explore. But when you look at their respective charts, you realize there are clearly growing pains!
Here are some solutions to improving fertility rates in America:
- Making more colleges free
- Limiting tuition increases to no greater than the rate of inflation
- Forgiving student loan debt
- Promoting trade school and online certifications
- Promoting state universities and community colleges
- Allowing for pre-tax 529 plan contributions and tax-free usage
- Making it easier to build more housing
- Mandating three months of paid parental leave benefits
If there are no policy changes, the future might see only the very rich or the very poor having kids. The middle class will simply opt-out. But the positive of not having kids is that more people could retire earlier and be happier as a result!
We Will Be “Maxing Out” Our 529 Plans
As a personal finance writer and author, I strongly believe education is what will set us all free. Therefore, I plan to keep contributing the maximum gift tax limit per year until I reach the legal maximum contribution amount.
The annual gift tax exclusion amount is $17,000 in 2023. And the maximum 529 plan contribution amount in California is $529,000, although the plan can grow more than $529,000 with returns. Check your own state's 529 plan contribution limit if you plan to max out your 529 plans as well.
If my wife and I provide nothing else for our children, it will be the gift of education. Once you have the proper education, endless possibilities open up!
Reader Questions And Suggestions
Readers, are you excited about being able to roll over leftover 529 funds into a Roth IRA? Do the new rules change your 529 plan contribution plans? How much do you plan to contribute to 529 plans?
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