Rollover leftover 529 funds into Roth IRAs

[euro]

According to this article, owners of 529 accounts with "leftover" balances will be able to roll over up to a total of $35'000 per beneficiary into Roth IRAs.
https://money.com/529-roth-ira-roll.../23 (Official)&utm_campaign=retire_with_money

The article is a bit fuzzy on details about whether it is possible to create additional beneficiaries and then distribute the rollovers more broadly. Does anyone have additional details or is it too early? The rollovers are supposed to start in 2024, so perhaps all the details haven't been sorted?

 

[oldtimer]

The dust hasn't settle yet. https://www.kitces.com/blog/secure-...29toroth-ira-transfers-allowed-after-15-years

May know more details at the end 2023.

 

[euro]

The dust hasn't settle yet. https://www.kitces.com/blog/secure-...29toroth-ira-transfers-allowed-after-15-years

May know more details at the end 2023.

Thanks for that link! Waiting with bated breath.... actually, I do think it is a good thing and I will likely be able to take advantage at least to some extent.

 

[SecondCor521]

According to this article, owners of 529 accounts with "leftover" balances will be able to roll over up to a total of $35'000 per beneficiary into Roth IRAs.
https://money.com/529-roth-ira-roll.../23 (Official)&utm_campaign=retire_with_money

The article is a bit fuzzy on details about whether it is possible to create additional beneficiaries and then distribute the rollovers more broadly. Does anyone have additional details or is it too early? The rollovers are supposed to start in 2024, so perhaps all the details haven't been sorted?

You can read the text of the bill yourself starting at page 858 of the following PDF:

https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf

Several key provisions that may answer your question:

1. The 529 account must have been in existence for 15 years prior to the rollover.

2. The rollover must be a direct rollover from the 529 to a Roth IRA for the beneficiary of that same 529.

So if I understand what you're asking, the answer is probably no, because doing so would probably not be able to meet both of the above requirements.

 

[kgtest]

I feel like this is a consequence of the marketplace asking the question "What happens if the 529 beneficiary/accountholder doesn't use/need the money in the 529 accoun?
. Is it then held hostage because they didn't require the funds for education related expenses? I think you can change the beneficiary somehow if you have multiple kids, but what if none of your kids end up needing the funds inside the 529? Well, enter a Roth IRA rollover. Much more flexible. I need to read up more on these 529s. What if the account holder dies and you have no more children to benefit from the funds in the 529? How is it handled in regards to distribution outside of educational related expenses? Our kids have over 20k in 529 now so I should learn a little more about it.

 

[SecondCor521]

I feel like this is a consequence of the marketplace asking the question "What happens if the 529 beneficiary/accountholder doesn't use/need the money in the 529 accoun?
. [1] Is it then held hostage because they didn't require the funds for education related expenses? [2] I think you can change the beneficiary somehow if you have multiple kids, but what if none of your kids end up needing the funds inside the 529? Well, enter a Roth IRA rollover. Much more flexible. I need to read up more on these 529s. [3] What if the account holder dies and you have no more children to benefit from the funds in the 529? [4] How is it handled in regards to distribution outside of educational related expenses? Our kids have over 20k in 529 now so I should learn a little more about it.

[Numbers added for reference.]

1. No. There are a number of options. It can be left in the account for later. It can be transferred to another beneficiary. It can be distributed with some taxes and (sometimes) penalties. Up to $35K can be rolled over to a Roth.

2. Yes. You can change the beneficiary or do a tax-free rollover to another 529 for most close family members, including siblings, parents, aunts, uncles, cousins, spouses, children, and grandchildren.

3. Death of the beneficiary allows you to distribute the funds. You'll be taxed on the earnings portion of the distribution, but no 10% penalty will be assessed.

4. Distributions for other than non-qualified educational expenses are allowed. Income taxes plus a 10% penalty are owed on the earnings portion of the non-qualified amount. There are exceptions to the 10% penalty, including death (as noted in #3), disability, scholarships, and attending a military academy.

Qualified expenses include tuition and fees, room and board if the student is more than half time, books and equipment, internet and computer equipment. Also included are up to $10K payments on student loans, and $10K per year for K-12 tuition. There are also included payments for certain apprenticeship programs.

See IRS Pub 970 for precise details.

 

[Vacation4us]

You can only roll over the max Roth limit per year. So these rollovers might take 5 plus years to accomplish to meet the allowable 35 k limit. A pain in the butt but I still plan on using DS 529 funds to buy him some old age security. DD May use all her funds I guarantee she’ll find this extremely unfair to her. But too bad.

 

[gcgang]

Where do they dream up this stuff? But I guess when you spend close to two TRILLION dollars, you need to be creative.

I’ve been paying daughter’s college expenses out of my own funds, as they will probably be subject to estate taxes, leaving the $150k 529 plan for my daughter to figure out later, either using for her unborn children, other higher Ed for herself, or just paying the penalty and withdrawing. Rothing some of it will be wonderful.

So thank you, dear lawmakers, for the spiff.

 

[euro]

You can read the text of the bill yourself starting at page 858 of the following PDF:

https://www.congress.gov/117/bills/hr2617/BILLS-117hr2617enr.pdf

Several key provisions that may answer your question:

1. The 529 account must have been in existence for 15 years prior to the rollover.

2. The rollover must be a direct rollover from the 529 to a Roth IRA for the beneficiary of that same 529.

So if I understand what you're asking, the answer is probably no, because doing so would probably not be able to meet both of the above requirements.

You can definitely create new beneficiaries (including yourself) but one of the unsettled questions is whether the 15 years start again for the new beneficiaries or not.

Another question in my mind is whether the beneficiary must be able to qualify for Roth contributions based on earned income and max income limitations. I sense the answer might be "yes" but I have not seen anything actually speaking to this.

 

[SecondCor521]

You can definitely create new beneficiaries (including yourself) but one of the unsettled questions is whether the 15 years start again for the new beneficiaries or not.

Right. The language in the law is brief and a bit unclear. Personally I think it would restart the clock, but that's just my opinion.

Another question in my mind is whether the beneficiary must be able to qualify for Roth contributions based on earned income and max income limitations. I sense the answer might be "yes" but I have not seen anything actually speaking to this.

The answer to this one is definitely yes to the earned income part and no to the max income limitations part. It's clearly stated in the new law, although it's convoluted because it refers to sections of existing law.