Cool Little New Strategy, Courtesy of Secure Act 2.0

Cool Little New Strategy, Courtesy of Secure Act 2.0

I wrote a blog a few weeks back on all the new changes that the Secure Act 2.0 is bringing us.  There are lots of new planning opportunities that have presented themselves due to all the changes and new provisions.  Depending on your unique circumstances there are plenty of ways to better your financial positioning with the new legislation. 

One of my favorite new options/strategies is the provision that allows you to move 529 assets to a Roth IRA.  Let me take a moment to highlight the new option and then I’ll speak to the planning strategy one can take advantage of.  Sounds like a plan?  Good!

The Secure Act and 529 Plans

Starting in 2024, if you have a 529 account that has been opened for at least 15 years you can now use up to $35,000 of those funds, for the beneficiary of the 529 accounts only, to contribute to a Roth IRA regardless of earning limit.  Now a few key provisions here are worth noting.  First, the beneficiary must still have earned income up to the amount you plan to convert over to a Roth.  Second, you are still limited to the current Roth annual contribution limit, currently $6,500.  Finally, no contributions or earnings made within the past 5 years are eligible to be converted. 

Now, there is a lot to unpack there, and clearly, there is an easy obvious strategy in the mix.  If you have leftover money in a 529 account, for whatever reason, you can simply convert it over (up to the limits) into a Roth for your child or grandchild.  Remember all these earnings are tax-free, which is a major win for said beneficiary.  The somewhat less obvious strategy is to do this purposefully and with intent.  Let me present an example that I think is a really cool planning opportunity.

Example: Your child, or better yet grandchild, is born on Jan 1, 2023.  Instantly you open a 529 account for this child which starts the 15-year eligibility clock.  Now, the key distinction here is mostly mental.  You can still fund this 529 account for college, but let’s say you or a wealthy/thoughtful relative is in a position to help this child’s financial future out.  They have basically a decade to get $35,000 “extra” funds in this 529 account, and by extra, I mean not allocated for college.  Then once the child is 16 years old (15 years have passed) and has a job paying them the income you start converting over these “extra” funds into a Roth each year until you hit the $35,000 maximum.  What are you left with?  A young adult with a healthy start on their financial future. 

Fun With Numbers

Now you may be thinking, big freaking whoop $35,000 in a Roth so what.  Well, let’s have fun with numbers, shall we?  I’ll assume the annual amount doesn’t change between now and then, which means it will take you a little over 5 years (income dependent) that it takes your child/grandchild to have the full $35,000 moved over from their 529 to their Roth account.  This means you have roughly a 21-year-old with $35,000 in a Roth IRA, soooooooo what?  Well, wise-guy I’ll tell you soooo what.  That amount in 40 years assuming a 10% annualized rate of return would amount to be…… $1,584,073. 

In other words, this child by their early 60s will have over a million and a half dollars in an investment account that can be accessed COMPLETELY TAX-FREE!  I won’t even blow your minds away by telling you that if it sat there another 10 years this amount would grow to $4,108,679 as I don’t think your brains can handle such information.  But if I did mention what it would grow to in 50 years, $4,108,679, which again I refuse to do out of precaution for your own safety, I assure you the numbers would blow you away. 

Now, think that all this came from a little strategy you heard, or passed along, 40-50 years ago from some crazy financial planner in Delaware.  Additionally, it only took $35,000 to make a massive difference in this child’s life.  Think about that legacy planning would ya!

Strategy Nuances

There are still multiple nuances of the strategy that we don’t have answers for yet, such as if you switch the beneficiary do you have to wait another 15 years to convert or not?  But, what we do know is that whether it be purposeful, or due to simply having extra funds in a 529 account there is now a fantastic strategy that can be used for the benefit of someone not named yourself.

Hope you enjoyed this little blog and certainly hope this strategy can help you or someone you love.  As always stay wealthy, healthy, and happy. 

If you prefer to watch our blogs, here is the video version: