Converting 529 to Roth IRA

[Octogirl]

I have read that the Secure Act 2.0 will allow converting 529 funds to Roth IRA in 2024. Does any one know more about the restrictions ?
My son has unused funds in a 529 account and I plan to convert it but am waiting for details.
Thanks

 

[SecondCor521]

I do. Here are several:

1. Your son must have earned income to support the 529->Roth rollover as if it were a contribution.
2. 529->Roth rollovers can only be done on or after 1/1/2024.
3. The account must have been open for at least 15 years as of the date of the rollover.
4. Contributions and their attributable earnings in the five years prior to the rollover are not eligible to be rolled over.
5. There is a lifetime maximum of $35,000 of rollovers per beneficiary.
6. The rollover must go from the 529 to a Roth IRA for the beneficiary.
7. 529->Roth rollovers count towards the annual contribution limit. So if your son made $50,000 on his job and made a Roth contribution of $3,000 out of his income, he would only be able to 529->Roth roll over another $3,500 (or whatever the 2024 limit minus $3000 works out to be).
8. The rollover must be direct. That is, it must go directly from the 529 account to the Roth account in order to qualify. Distributing the 529 to you or your son and then making the Roth contribution wouldn't work.

There may be others I'm not recalling offhand.

The only other thing of note is that the Roth contribution MAGI limits specifically don't apply to 529->Roth rollovers. So if your son is high income and ineligible for a direct Roth contribution, he could still do a 529->Roth rollover (subject to the above limitations).

HTH.

 

[retire2020]

It had me excited until I found out that beneficiary had to have earned income. I will have couple kiddos in Medical School and know that they will not be able to have any earned income for four years from 2026-2030 so was hoping to fund their Roth IRA for those four years. Well…I will have lots of leftover but I will have that go to grand kids’ education.

 

[SecondCor521]

It had me excited until I found out that beneficiary had to have earned income. I will have couple kiddos in Medical School and know that they will not be able to have any earned income for four years from 2026-2030 so was hoping to fund their Roth IRA for those four years. Well…I will have lots of leftover but I will have that go to grand kids’ education.

Another option would be to fund their Roth IRAs when they graduate from med school and start earning an income. Unlike regular contributions, 529->Roth rollovers are exempted from the MAGI limitations, so a (presumably) high earning doctor would still be able to take advantage of the 529->Roth provisions.

Then they can take what they would have contributed to Roth and apply that to their next highest priority - house down payment, wedding, whatever.

Keeping it for grandkids is a great choice too.

 

[Phroig]

I hadn’t heard about this - thanks, both, for posting. I’ve now read a few news reports, but they don’t mention the earned income requirement. Your source seems more comprehensive; would you mind sharing it?

I wonder if the rollover counts as a qualified expense. If not, my state claws back the tax break on contributions. Also, a direct rollover from a parent-owned 529 to a child-owned Roth is going to be tricky; I hope the providers don’t make it too difficult.

 

[SecondCor521]

I wonder if the rollover counts as a qualified expense. If not, my state claws back the tax break on contributions. Also, a direct rollover from a parent-owned 529 to a child-owned Roth is going to be tricky; I hope the providers don’t make it too difficult.

Yes, 529->Roth rollovers count as a qualified expense for 529 purposes if they meet the various criteria.

This provision takes effect in 2024; the 529 and Roth providers have a year to get the process support in place.

 

[New Thinking]

A couple of posters have indicated that to convert from a 529 plan to a Roth IRA there must be earned income. Can you point to a reference as I don't believe this to be correct? I know a conversion counts against the Roth IRA annual contribution amount but haven't seen a source that says there must be earned income (as there is with "normal" Roth IRA contributions).

 

[Ncc1701]

A couple of posters have indicated that to convert from a 529 plan to a Roth IRA there must be earned income. Can you point to a reference as I don't believe this to be correct? I know a conversion counts against the Roth IRA annual contribution amount but haven't seen a source that says there must be earned income (as there is with "normal" Roth IRA contributions).

I dont' think it's correct either. I haven't found anything that states conversions from 529 have to be against earned income.

 

[SecondCor521]

A couple of posters have indicated that to convert from a 529 plan to a Roth IRA there must be earned income. Can you point to a reference as I don't believe this to be correct? I know a conversion counts against the Roth IRA annual contribution amount but haven't seen a source that says there must be earned income (as there is with "normal" Roth IRA contributions).

It's in the text of the law(s) themselves. Here's a link to a good post from a Boglehead with all the relevant citations laid out:

https://www.bogleheads.org/forum/viewtopic.php?p=7032204#p7032204

And here's a similar post from me pointing out the same thing:

https://www.bogleheads.org/forum/viewtopic.php?p=7032589#p7032589

And if you trust Kitces, there's this quote:

"The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year, less any 'regular' traditional IRA or Roth IRA contributions that are made for the year (in other words, no doubling up with funds from outside the 529 plan)"

from https://www.kitces.com/blog/secure-...roth-rollover-increase-qcd-student-loan-match