The SECURE 2.0 Act (signed back in 2022) has opened an exciting planning opportunity for 529 account owners. Owners of 529 plans can now roll funds into a Roth IRA, subject to the provisions below. This increases the flexibility of 529 plans and allows savers additional options when it comes to unused funds in a 529 plan.
While this provision is still new, here are the main rules that we do know:
- The account must be open for at least 15 years before any funds can be rolled into a Roth IRA
- The 529 beneficiary and the Roth IRA owner must be the same person
- The rollover doesn’t exceed the Roth IRA owner’s contribution limits such as:
- Not exceeding Roth IRA owner’s earnings for the chosen year.
- Not exceeding applicable Roth IRA contribution limits.
- Not exceeding an aggregate rollover amount of $35,000.
- Not exceeding the total amount contributed to the 529 account (including related earnings) before the five-year period prior to the rollover.
- Depending on your state, you may have to reclaim any state tax deductions or state tax credits you received in previous years for contributions that are rolled over into the Roth IRA.
- Funds must be rolled over directly from the 529 plan custodian to the Roth IRA custodian. No indirect rollovers are allowed.
Here are some provisions we are still awaiting clarification on from the IRS:
- If you change the beneficiary of a 529 plan, does it restart the 15-year clock?
- If your current 529 account was opened with a rollover from another 529 plan, does this reset the 15-year clock?
- Do internal transfers (i.e. from one beneficiary to the other) impact the ability to rollover to a Roth IRA?
The 529 plan to Roth IRA conversion is a valuable new option for 529 account holders. However, it's important to proceed with caution. Before executing a rollover, carefully consider the potential pitfalls and ensure you meet all eligibility requirements. Additionally, assess whether this conversion is the most advantageous strategy for your specific financial goals and circumstances.
If you have a 529 plan, and are wondering if this new provision is right for you, please don't hesitate to contact us.