REVOLUTIONIZING COLLEGE SAVINGS AND STUDENT DEBT: UNVEILING THE IMPACTFUL SECURE 2.0 ACT
In a significant move to address the financial burdens faced by families and individuals planning for higher education, Congress passed the SECURE 2.0 Act in December 2022. This act brings about two important provisions that will come into effect in 2024. Let's dive into these changes that offer more flexibility for saving and managing college expenses.
529 Plan to Roth IRA Rollover: 529 plans have long been favored as tax-advantaged savings accounts for college savings. The SECURE 2.0 Act introduces a new option for families with surplus funds in their 529 plans. Starting in 2024, beneficiaries can roll over up to $35,000 from a 529 plan to a Roth IRA over their lifetime. However, it's important to note the specific rules governing this rollover:
· Rollovers are subject to the annual Roth IRA contribution limits, which means beneficiaries cannot transfer the entire $35,000 at once. Instead, they can roll over the current year's contribution limit (e.g., $6,500 in 2023) or their earned income, whichever is less.
· To qualify for tax- and penalty-free rollovers, the 529 plan must have been open for a minimum of 15 years. Changing the beneficiary of the 529 plan could potentially reset the 15-year clock.
· Contributions made within five years of the rollover date are not eligible for rollover. Only contributions made outside this five-year window can be transferred to the Roth IRA.
Consider Kate, who opens a 529 plan for her son Joe at three years old. After 15 years of contributions, Joe graduates from college, leaving surplus funds in the 529 account. Joe can now roll over funds to a Roth IRA, up to the annual contribution limit, provided he hasn't made contributions within the past five years. This rollover option can be utilized annually until reaching the $35,000 lifetime limit.
Student loan repayments
Student Loan Payments and Employer Retirement Match: Recognizing the burden of student debt on employees and their retirement savings, the SECURE 2.0 Act introduces a noteworthy provision. Starting in 2024, employers will have the option to consider employee student loan payments as contributions made to a qualified retirement plan. This classification allows such contributions to become eligible for employer retirement matching, if offered by the employer.
The SECURE 2.0 Act introduces valuable changes to alleviate the financial challenges associated with higher education expenses and student debt. The new provisions enable 529 plan beneficiaries to roll over funds to a Roth IRA, enhancing savings flexibility for families. Additionally, the act empowers employees with student loans to benefit from employer retirement matches by treating their loan payments as elective deferrals. These developments mark significant progress toward easing the financial burden and promoting a brighter future for education and retirement planning