Congress included a provision in SECURE 2.0 that allows for rollovers of unused 529 funds to Roth IRAs. Under the old tax rules, if funds in a section 529 plan are not used for education, the earnings are taxable and subject to a 10% penalty.
Now, Congress included a provision in SECURE 2.0 that allows for rollovers of unused 529 funds to Roth IRAs.
According to the Journal of Accountancy, here’s what you need to know about the new 529-to-Roth rollover provision:
This provision takes effect in 2024, not 2023.
The 529 plan must be open for at least 15 years.
The lifetime limit for the rollover is $35,000 per beneficiary.
The Roth IRA must be in the name of the beneficiary of the 529 plan.
Any contributions made within the past five years (and earnings on those contributions) are ineligible to be moved into the Roth IRA.
The annual limit on the rollover is the IRA contribution limit for the year, less any other IRA contributions.
For example, the current IRA contribution limit is $6,500. If the beneficiary made any IRA contributions, the rollover amount must be reduced by those contributions. Therefore, if the beneficiary contributed $2,000 to any IRA, the amount available for rollover is $4,500.
Consequently, getting to the $35,000 lifetime limit may take more than five years.
The rollover must be a plan-to-plan or trustee-to-trustee rollover. This means you cannot take a check from the 529 plan to deposit into the IRA.
The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary’s income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.
The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit. Therefore, if the beneficiary is not working, no rollover is available because there is no earned income.
If you’re planning on a 529-to-Roth IRA conversion in 2024, I suggest waiting until later in the year, the IRS and states may issue more guidance.
For instance, it’s unclear whether beneficiary changes restart the clock for the 15-year waiting period or whether states will mirror federal law and allow income tax and penalty-free rollovers. Typical right?
If you would like guidance on your own financial decisions, Roth conversions, or a portfolio review, please email us st info@commonfinancialsense.com
