While most of the provisions of the Securing a Strong Retirement Act of 2022 (SECURE 2.0) benefit those who are contributing part of their paycheck to their employer’s retirement plan, there are a few unique features for those who are either struggling to pay off student loans or have leftover money in the 529 College Savings Plan.
Matching student loan contributions
Many college graduates are facing decades of monthly student loan payments. If they’re not in the peak earning years, they may need to prioritize reducing their debt over saving for retirement.
SECURE 2.0 recognizes this struggle, and now provides a way for employers to ease this “either/or” situation.
Starting in 2025, employers will be able to make contributions to plan participants’ retirement accounts that match these employees’ monthly student loan payments. Employees who make loan payments and contribute to their plan can receive both student loan and regular retirement matching contributions.
529 College Savings Plan to Roth IRA rollovers
It doesn’t happen that often, but sometimes college graduates end up with a significant amount of money left over in their 529 College Savings Plan. Normally, withdrawing any of this money for non-educational purposes would result in an IRS penalty of 10% of the removed amount. And these withdrawals would be considered taxable income.
SECURE 2.0 offers an alternative. Any parent or child who is the beneficiary of a 529 Plan may be able to roll over a lifetime total of up to $35,000 to a Roth IRA without having to pay penalties or income taxes on these distributions.
You can’t roll over the $35,000 all at once. Rather, you must do it over a multi-year period, with combined annual contributions from all sources not exceeding whatever the Roth IRA contribution limit is at the time (currently $6,500 in 2023).
However, this special 529 Plan rollover isn’t subject to the income limitations that normally limit how much highly paid employees or those earning little or no income can contribute to a Roth IRA.
SECURE 2.0 attaches several conditions to this rollover opportunity:
- Only the beneficiary of the 529 Plan can roll over the leftover money. The beneficiary must also be the owner of the Roth IRA.
- Rollovers are only allowed for 529 Plan accounts that have been established for the original beneficiary for at least 15 years.
- Beneficiaries may not roll over any contributions made or earnings accrued over the five-year period preceding a rollover.
There are still a number of gray areas regarding this strategy that will require clarification from the IRS over the new few years, That’s why it’s important to consult with a tax professional or financial advisor before you take advantage of this unique opportunity.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer before you implement any of these strategies.
This article was authored by Joelle Spear and Jeffrey Briskin. Joelle is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or firstname.lastname@example.org. Jeffrey Briskin is Director of Marketing at Canby Financial Advisors.
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