SECURE ACT 2.0: How 529 Plans Are Becoming More Attractive

January 31st, 2023 by Blake Pinyan

On December 20th, 2019, the first SECURE (Setting Every Community Up For Retirement Enhancement) Act was signed into law. Three years later, almost to the day (December 29, 2022), SECURE Act 2.0 became official.

This new legislation is meant to build off the original bill and includes over 90 changes to tax law. A whole white paper could be written on all the new provisions. But, for this article’s sake, I’ll focus on one of the more attention-grabbing topics: the 529 plan to Roth IRA transfer. For some context, a 529 plan is an account that is used to save for/pay education expenses. A Roth IRA is a retirement account in which contributions are after-tax and future withdrawals – after meeting certain criteria – are tax-free. I’ll outline the stated transfer rules for the new 529 provision, the unknowns, and the embedded Financial Planning opportunities.

Stated Transfer Rules

 The SECURE Act 2.0 says that beginning in 2024, 529 plan owners will have the ability to transfer money to their account beneficiary’s Roth IRA. However, there are a lot of strings and conditions attached to this for the transfer to be allowable. 

  • Transfers are only permissible to the 529 beneficiary’s Roth IRA and not the owners. Typically, the owner of a 529 plan is a parent, grandparent, or another related family member, and the child is the beneficiary. Meaning, a Roth IRA would need to be created for the child and the money would transfer into his/her account (if the beneficiary is not changed).
  • Roth IRAs can also only be contributed to if the owner has earned income. As a result, only 529 beneficiary children with some type of compensation would be eligible for this funding.

IRA Contribution Limits

There are contribution limits when we are talking about IRA’s.  The maximum annual contribution amount totals for your combined Traditional IRA and ROTH IRA for tax year 2023 is $6500 for those under 50 and $7500 for those over 50.  You can now make those contributions in 3 ways:

  • Make cash contribution to an IRA
  • Make cash contribution to a ROTH IRA
  • Transfer from a 529 Plan to a ROTH IRA

So, the maximum amount that you can move from the 529 plan to the Roth IRA each year is the same as the annual maximum stated above. The IRS doesn’t care if you contribute to the maximum in one method or a combination of multiple.  What matters is that you don’t exceed those stated caps. Over-funding can result in a 6% excess contribution penalty for each year the extra money stays in the account.

In the same vein as the annual limits, the maximum lifetime limit that can be transferred from the 529 plan to the Roth is $35,000. This does not appear to be indexed for inflation. Based upon the 2023 annual IRA contribution limits, this lifetime maximum would only permit about 5 years of transfers.

Time Factor

The other crucial details are related to time.:

  • Notably, the 529 plan must have been active for at least 15 years before any transfer can be made. You can’t open a new 529 one day and fund the Roth the next.
  • Contributions and earnings attributed to the 529 plan within the last 5 years cannot be moved. Therefore, if you wanted to complete a transfer the day after the 15th anniversary of the 529 plans’ opening, the money would have to be sourced from years 1-10.

The Unknowns

Whenever a large piece of legislation gets signed into law such as this, there are more questions than answers. There are a lot of unknowns within the SECURE Act 2.0, especially with this new 529 provision. The only thing that we can do is wait for more guidance, but we believe it’s important to share the questions that are on our minds.

The most glaring unknown with this new rule is how they are going to treat changes in beneficiary designations as it relates to the 15-year 529 plan holding clock. As it stands today, you can change a beneficiary on a 529 plan at any time to a qualifying family member – including the owner – as defined in Internal Revenue Code section 529. The question is, will a 529 plan beneficiary change restart the clock? Specifically, once you have a 529 plan for at least 15 years, can you keep changing the beneficiary to a different family member after one reaches his/her respective lifetime maximum transfer of $35,000? Or does each beneficiary have their own 15-year holding period that they must meet before the transfers to his/her Roth can be made?

The legislative text is not entirely clear, but some people believe congress has seemed to indicate that the 15 years will not be impacted by a change in beneficiary. This hypothesis stems from the fact that many parents and grandparents are sometimes reluctant to save in 529 plans due to the unpredictability of the child’s future education path. Particularly, the fear of funding the account and it not getting used due to the child not going to college, receiving scholarships, etc. The goal of this bill is to build up the retirement savings of more Americans. Not restarting the clock would do so, as a parent could then technically change themselves from the 529 plan owner to beneficiary and fund their own Roth IRA.

Another unknown is the maximum lifetime limit of $35,000. As mentioned earlier, it doesn’t look like this will be indexed for inflation. Will they change this maximum lifetime limit 5-10 years from now when $35,000 is not worth the same as it is today?

Finally, we are curious how they are going to regulate/enforce the last 5 years of the earnings/contributions rule:

  • Are the 529 plan custodians going to tell us which money is eligible to be transferred or do we need to determine that ourselves?
  • Do all the 529 plan custodians have easily accessible records going back that far? What about those people that rely on paper statements?
  • How is the IRS going to be involved?
  • Will it be an honor system when it comes to citing where the money came from, or will you need to provide calculations on a new tax form?

Once more, there are still a lot of questions that need to be answered. When we get updates, rest assured that you will too.

Financial Planning Opportunities

There are a handful of restrictions on the ability to perform this transfer, but some great financial planning opportunities exist as well (for those eligible):

  • The biggest one revolves around what I hinted at earlier with the potential change of beneficiary opportunity. If there’s no resetting of the 15-year clock for beneficiary changes, we will likely see a huge influx of more cash into 529 plans. Generational ones could be formed as there’s no requirement to empty them out over a set period, unlike other educational savings accounts (Coverdell ESA).
  • Contribution maximums also vary from state to state and are treated as gifts rather than IRS caps.
  • Furthermore, with 529 plans, you can front-load 5 years’ worth of contributions in one year and not impact your lifetime estate tax exemption amount.

All this to say, large 529 plans could be the next thing. If the money isn’t used for education expenses, you could keep the account open and active for generations of tax-free growth and Roth IRA transfers.  For Example:

  • A parent could front-load 5 years’ worth of the annual gift tax exclusion – which is $17,000 in 2023 – into a 529 plan for their child once they are born. This would be a total contribution in year 1 of $85,000. If they are married, they can double that to $170,000, and the lifetime estate tax exemption is not impacted.
  • In year 16, after 15 years of growth on the original contribution, they can start funding their child’s Roth IRA each year up to the annual maximum contribution limit.
  • Once reaching the lifetime limit of $35,000, they can change the beneficiary to another qualifying family member or even themselves and use up a different person’s lifetime maximum.
  • Along the way, they can keep contributing to the account and potentially receive a state tax deduction and enjoy the benefit of tax-deferred investment growth.

Remember, they just can’t source the transfer money from the last 5 years of contributions/earnings. You can then see how this funding of Roth IRAs could last for generations if the family has the cash to contribute.

Lastly, Single filers that have a Modified Adjusted Gross Income (AGI) of over $153,000 in 2023 cannot contribute to a Roth IRA. That threshold is $228,000 for Married Filing Jointly filers. The 529 plan to Roth transfers will not be subject to these same income limitations. Consequently, this form of funding could serve as an alternative method for higher-income individuals and families to get Roth money into their accounts (when they can’t contribute normally because of their income).


Albeit the conditions, the 529 plan to Roth IRA transfer is an exciting new provision that came out of the SECURE Act 2.0. The theme to us is that it’s now generally recommended to open the 529 plans sooner than later, ideally when the beneficiary is born, to start the 15-year clock. Moreover, it seems that the fear of overfunding the account will be lessened now that this relationship has been developed with the Roth.