529-to-Roth Rollovers: What We Still Don’t Know
What You Need to Know
- The IRS has yet to release detailed guidance on the rules around this Secure 2.0 provision, which took effect this year.
- There are a number of open questions, such as how the lifetime limit is applied and how beneficiary switches are handled.
- Clients would be wise to tread carefully until the IRS provides more clarity.
It’s now 2024, and the Secure 2.0 Act’s 529-to-Roth IRA transfer option is officially live and available to taxpayers. However, the IRS has yet to provide any type of detailed guidance on the rules that will apply to these rollovers.
While allowing taxpayers to execute tax- and-penalty-free rollovers from 529 plans to Roth IRAs can be extremely helpful for taxpayers who don’t end up needing the college savings funds, the details are always important. While some issues have been addressed squarely by the law itself, we continue to await guidance on some important issues from the IRS — meaning that clients should tread carefully when determining how to interpret certain rules.
529-to-Roth Transfers: The Basics
Under the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act, beginning with the 2024 tax year, taxpayers are officially permitted to roll Section 529 plan dollars into a Roth IRA if certain conditions are met. The option can be particularly useful in situations where the plan’s beneficiary does not attend college or is able to fund their education with scholarships and other types of aid.
For the rollover to be permitted, the Section 529 plan must have been maintained for at least 15 years. Additionally, any 529 plan contributions made in the prior five years cannot be rolled into the Roth IRA. That includes earnings on any contributions that were made in the five years leading up to the rollover.
The Roth IRA contribution limits for the year of the rollover also apply. In other words, the maximum that a taxpayer could roll over from the 529 plan to the Roth IRA in 2024 is $7,000 ($8,000 for those aged 50 and older), meaning that rollovers of excess 529 plan funds may need to be accomplished over a period of years. It’s also important to remember that the beneficiary who is executing the rollover must then have earned income for the year (or years) in which the rollover is made.
As the law is written, the 529 rollover replaces the taxpayer’s IRA contribution for the year (i.e., there is one single $7,000 limit for 2024 — not a $7,000 limit for direct contributions and a $7,000 limit for 529 plan rollovers).
Further, the most that a taxpayer can ever move from a 529 plan into a Roth IRA is $35,000 over the course of the taxpayer’s lifetime. Each year, Roth rollovers are limited to the difference between the amount transferred and any regular or Roth IRA contributions made during that year. The rollovers are not subject to the income restrictions that prevent certain high-income taxpayers from contributing directly to a Roth IRA.