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Secure Act 2.0 New Regulations Increase 529 Flexibility

A 529 plan, which allows U.S. citizens to invest funds toward their children’s education on a tax-free basis, is an excellent vehicle for preparing for the growing costs of higher education. However, previous regulations surrounding 529 plans caused concern around over-saving and the implications of unused 529 balances.

Prior to the Secure Act 2.0, unused funds were subject to a 10 percent penalty and federal taxes unless transferred to a new beneficiary. This rule, combined with strict guidelines surrounding the educational use of investments, resulted in costly over-estimations of educational expenditures.

The Secure Act 2.0, passed in December 2022, helps alleviate this concern, introducing the ability to transfer unused 529 balances to the beneficiary’s Roth IRA. As a result, rather than facing penalties for over-saving, individuals can contribute additional savings toward their child’s retirement fund starting in the 2024 fiscal year.

It is important to note that there are some limitations to the increased flexibility. Transferred funds must not exceed Roth IRA contribution limits—which caps at $6500 as of 2023. To transfer funds, the owner must have opened the 529 account at least 15 years ago and have had the funds in the account for at least five years, preventing individuals from opening an account and transferring funds immediately.