Don't take down your holiday decorations just yet! With its inclusion of Secure 2.0, the Consolidated Appropriations Act of 2023 (the “CAA”) delivered a few extra presents in late December to administrators of State-run Investment Plans. We celebrate the CAA provisions affecting 529, ABLE and State-run Auto-IRA Plans, but with time to digest the details, we are less confident about an immediate or near-term impact on State-run Investment Plans as the provisions come saddled with several limiting characteristics.
Uses for 529 accounts have expanded considerably in recent years, and the CAA continues this trend. Beginning January 1, 2024, monies from a 529 account can be transferred tax-free to a Roth IRA for the same beneficiary. While this provision can help jump start an individual’s Roth IRA savings, it comes with certain limits.
First, the 529 account has to have been maintained for at least fifteen years. Second, there are several limits on the amount of the rollover: (i) annual rollovers are subject to yearly IRA contribution limits, minus any other IRA contributions that have already been made; (ii) there is an aggregate rollover limit of $35,000 per beneficiary; and (iii) it appears that rollovers may not include contributions (including earnings thereon) made to the account in the last five years. Finally, the beneficiary of the 529 and the Roth IRA must be the same individual, so Roth IRA owners are unable to receive 529 rollovers from an otherwise allowable member of the family. Taken together, these requirements will significantly limit the amount of tax-free transfers permitted by the new 529-to-Roth rollover provision. The change will also impose a number of administrative challenges for 529 Plan administrators that have only a year to update operating procedures, website functionality, forms, disclosures, brochures, presentations, compliance mechanisms and more.
ABLE Programs have good reason to celebrate: State administrators and advocates have won a long-fought battle to raise the age of ABLE eligibility. Currently, individuals are only able to open an ABLE account if their qualifying disability occurred before age 26. The CAA increases this limit to age 46, increasing the ABLE-eligible population by an estimated 75%. This change makes ABLE accounts available to a projected 6 million additional people, including 1 million veterans with disabilities.
Although this change is cause for excitement, it's not cause for urgency: unfortunately, the age adjustment does not go into effect until January 1, 2026. This stymying detail gives State administrators an over-abundance of time to address the numerous changes that need to be made to State rules or regulations, ABLE Plan operating procedures, website functionality, forms, disclosures brochures, presentations, compliance mechanisms and more. That said, Plans should begin considering how the age adjustment will positively change outreach strategies. Disability groups that were difficult to engage before may become a key focus in ABLE education and outreach — including, for instance, veterans with disabilities and individuals with traumatic injuries that occurred after age 26. A number of mental illnesses also present in middle-age, as do a host of rare and terminal diseases. The ABLE doors will open to all of these groups in January 2026. But again, ABLE Programs should not overlook the details — the ABLE age adjustment goes into effect at the precise moment that ABLE to Work contributions and 529-to-ABLE rollovers end for all account holders. A victory was won in the CAA but the road to realizing the benefits is long.
Today, State Auto-IRA Programs use Roth IRAs as the primary retirement vehicle, funded with after-tax payroll deductions. The allowable 529-to-Roth IRA rollovers described above could increase funds in these Programs, as long as the 529 beneficiary is also the Auto-IRA account owner. Otherwise, in our view, the modification of the Saver’s Credit is the only meaningful change for State-run Retirement Programs. The existing Saver’s Credit provides a tax break for low-to-middle-income earners who save for retirement (or who make contributions to their IRAs, employer retirement plans, and ABLE accounts). For savers below specified adjusted gross income thresholds, the new Saver’s Credit turns this tax credit into a government matching contribution of up to $1,000 (50 percent of IRA or other eligible plan contributions up to $2,000 per individual). Credits will be treated as pre-tax contributions and thus will be taxable when distributed. A significant change but the legislative details impose a huge lag - the provision will not be effective until January 1, 2027.
One final note related to retirement savings is that the CAA includes substantial improvements that directly apply to ERISA plans. While not applicable to State-run Auto-IRAs, we note the apparent easing of the ERISA annual paper statement delivery requirement. Assuming compliance with other provisions, the CAA will allow electronic delivery for qualified plan participants who become eligible as of January 1, 2026, as long as the plan provides a one-time initial paper notice, prior to the first statement being delivered electronically, advising the participant that he/she has the right to receive all required disclosures on paper. It also appears that qualified plans will not be able to charge fees for paper statement delivery. Although clearly not applicable to State Auto-IRAs today, figuring out how to implement this in the future would positively influence participant costs in State Auto IRAs by eliminating the current charges for paper delivery of an annual account statement.
Overall, the CAA’s 4,000+ pages present a wide range of beneficial savings opportunities for individuals and small businesses. The provisions that benefit 529, ABLE and Auto-IRA Programs are slim, and will require significant work by State and private sector administrators. But implementation lags mean that time is on your side. With the changes in place, 529, ABLE and State Auto-IRA Programs will continue to offer the most compelling ways to save to education, disability expenses, and retirement.
We would be happy to discuss these insights in more detail at any time. Please contact us if we have piqued your interest. AKF Consulting is a leading SEC- and MSRB-registered Municipal Advisor to public administrators of 529, ABLE and State-run Retirement Programs. We work with State governments and public entities nationwide to structure programs that help people save for education, disability-related expenses and retirement.