Tax-Free 529 To Roth IRA Considerations, #191

Retire With Ryan

On December 23rd, 2022, congress passed the SECURE 2.0 Act. Among the many changes, one of them had to do with 529 plans. You can now make tax-free and penalty-free rollovers from a 529 plan to a Roth IRA.

This became effective 1/1/2024. Before this, if you wanted to take a non-qualified withdrawal from a 529 plan (using the money for something outside of school expenses) the gain was subject to income tax and a 10% penalty. It’s similar to taking a withdrawal from an IRA.

If you have unused money in a 529 plan, it can be rolled over to a Roth IRA for the beneficiary of that 529 plan—tax and penalty-free. The added benefit is tax-free growth and tax-free distributions when they take money out down the road.

What other details do you need to know? Who qualifies for these rollovers? Learn more in this episode of Retire With Ryan.

You will want to hear this episode if you are interested in...

• Sign up for the Retirement Readiness Review [0:56]
• Tax-free and penalty-free rollovers [1:41]
• What are the rollover rules? [3:16]
• Questions the IRS still needs to answer [6:13]
• Does every 529 plan provider allow rollovers? [8:01]
• How do you make a rollover? [8:53]
• Can you make a rollover? [10:38]

What are the rollover rules?

There is a $35,000 lifetime rollover limit per beneficiary. However, you can’t roll over the entire amount at once. You’re still subject to the annual Roth IRA contribution limits for 2024 and beyond.

Someone under 50 can roll over $7,000 to a Roth IRA. If they’re over 50, they can roll over $8,000. If your child has already contributed $3,000 to their Roth IRA, you can only roll over $4,000. Here are some other rules to be mindful of:

• The 529 account needs to be 15 years old or older.
• The Roth IRA needs to be in the same name as the beneficiary in the 529 plan.
• The rollover must be a direct rollover (the 529 company makes a check payable to the Roth IRA company—you cannot take receipt of the money)
• Contributions and earnings on the contributions made on the last five years cannot be converted
• A 529 beneficiary needs to have earned income equal to the amount of money being rolled over (if your beneficiary is in high school and doesn’t have a job, you can’t do a rollover)
• There’s no adjusted gross income earnings limit

Questions the IRS still needs to answer

What if the 529 account has been open for 15 years but you changed the beneficiary? Does the current beneficiary qualify? What if you change 529 companies during that time? When you hit the maximum of $35,000, can you change the beneficiary to someone else?

How does your state treat the rollover? Will it be taxed? Who is tracking the gains from contributions? These are some of the many questions that the IRS hasn’t clarified yet.

How do you learn if your 529 plan provider allows rollovers? There are hundreds of 529 providers and no blanket answer. Reach out to your specific provider. The plan I have with Fidelity can process the rollovers. How a rollover is done will vary depending on the provider. For the CHET plan, you complete a form and submit it to make the transfer.

Can you make a rollover? Should you make a rollover? Listen to hear my thoughts!

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• 529 plan distribution form (Connecticut)
• The Connecticut Higher Education Trust 529 Plan

Connect With Morrissey Wealth Management

www.MorrisseyWealthManagement.com/contact

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