SECURE 2.0 Act – Section 126. Special Rules for Certain Distributions from Long-term Qualified Tuition Programs to Roth IRAs

SECURE 2.0 Act – Section 126. Special Rules for Certain Distributions from Long-term Qualified Tuition Programs to Roth IRAs

Section 126 of the SECURE 2.0 Act (SECURE 2.0) allows for tax and penalty free rollovers from 529 accounts to a Roth IRA effective in year 2024.

Specifically, beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. While this provision has garnered much attention,  several conditions required in order to take advantage of Section 126:

• The receiving Roth IRA must be owned by the beneficiary of the 529 plan.
• The 529 plan must have been maintained for 15-years or longer.
• The rollover amount cannot exceed the aggregate amount contributed  to the 529 (including investment earnings) over the preceding 5-year period ending on the date of the distribution.
• The annual transfer amount from the 529 to the Roth IRA is limited to annual IRA contribution limits, and is reduced by any “regular” Roth IRA contributions made during the tax year.
• The Roth IRA owner must have taxable income at least equal to the amount of the rollover.
• The rollover transaction must be funded via a direct trustee-to-trustee transfer.

While there is an extensive list of conditions for this rollover transaction to be allowable, there is one advantage for individuals that may be otherwise prohibited from making regular Roth IRA contributions as a result of Modified Adjusted Gross Income (MAGI) exceeding applicable thresholds.

Specifically, the MAGI limitations that apply to regular Roth IRA contributions will not apply to eligible rollovers from 529 plans to Roth IRAs.

If you have any questions about SECURE 2.0, please contact a member of the Schneider Downs Retirement Solutions team at [email protected].

This article is part of a series highlighting the impact of the SECURE 2.0 on retirement plan sponsors, participants and retirees. You can view our full catalog of SECURE 2.0 articles here or download our comprehensive SECURE 2.0 eBook here.

About SECURE 2.0

SECURE 2.0 was signed into law by President Biden on Dec. 29, 2022, as part of a $1.7 trillion omnibus spending bill.

This massive piece of legislation builds on the foundation that was laid by the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act to further improve upon the success of the private employer-based retirement system by making it easier for businesses to offer retirement plans and for individuals to save for retirement.

The full text of SECURE 2.0, including provisions that affect pension and cash balance plans, may be found on pages 2,046-2,404 of the omnibus Consolidated Appropriations Act of 2023.

About Schneider Downs Retirement Solutions

Schneider Downs Retirement Solutions has experience in all facets of qualified and non-qualified plan delivery, which allows us to be flexible to the needs and direction of our clients. Our specialized team of advisers and consultants provide objective advice and expertise to help plan sponsors govern their retirement plans appropriately, mitigate risk, improve participant outcomes and support efficient and compliant plan operations. 

Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.