Qualified tuition savings plans, better known as 529 plans, have become a popular way to save for college. The SECURE 2.0 Act of 2022 now makes it possible to use these tax-advantaged accounts to fund beneficiaries’ retirement accounts. (Tax-advantaged treatment applies to savings used for qualified education expenses. State tax treatment varies.) Starting in 2024, 529 plan assets can be rolled over directly into a Roth individual retirement account (IRA) for the beneficiary of the 529 plan, within certain limitations.

This presents a good opportunity to incorporate 529s into discussions with employers, participants and wealth clients — and an effective way to form connections with the next generation of potential clients.

How to qualify for a penalty-free 529 to Roth IRA rollover

A few conditions must be met to roll assets from a 529 to a Roth IRA:
 

• The 529 account must be at least 15 years old.
• The Roth IRA must be in the same name as the beneficiary of the 529 plan.
• The amount to be rolled over must have been in the account for at least five years.
• Rollover contributions must be within Roth IRA annual contribution limits. The limit is $7,000 in 2024 and is reduced by any “regular” traditional or Roth IRA contributions made by the beneficiary in that year.
• Rollovers are limited to a maximum of $35,000 per beneficiary over their lifetime.

A conversation starter for plan sponsors

If this new allowance sparks greater interest in 529 plans, employers may be keen to consider them as a way to help attract and retain employees. Now may be a good time to start discussing the benefits of employer-sponsored 529 plans with your defined contribution clients. These benefits include high contribution limits, spending flexibility and tax advantages.
 

Employer-sponsored 529 plans also offer an inroad to businesses with which you’d like to establish relationships, as well as a way to develop broader and deeper client relationships with existing 401(k) plan sponsors. And there is no law requiring minimum participation. While widespread employee participation is welcome, a single shareholder is enough for some plans.
 

You may find that this topic pairs well with other conversations to have with plan sponsors about SECURE 2.0.

Connect to the next generation

As part of clients’ broader financial picture, 529 plans can be a way to make yourself known to your clients’ beneficiaries. Financial professionals often lose assets when they’re transferred to their clients’ children, who then can choose alternate firms or professionals. Rolling unused assets from a 529 plan to a Roth IRA in the name of the 529 plan beneficiary, when appropriate, is an opportunity to make a connection with that next generation. This may increase your chances of becoming their professional of choice when they need financial guidance in the future.

Additionally, if you’re advising a plan, you may also use this topic to connect with younger participants. Talk to them about this new option for unused funds they may have in 529 plans. 

Ask for help

If you’re interested in employer-sponsored 529 plans or have any questions, reach out to your Capital Group team. Our teams are poised to help you explore opportunities and guide you through conversations with employers.

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