Rolling 529 to Roth

[HenryD]

We used a few 529s to save for DD's college. There was almost enough for her to fund a BA/BFA at her dream private institution, as long as she worked some and took a small loan. With no push from me, after her first year there she transferred to the local state school and has been working her butt off. She is on track to graduate on time with a double major and last night told me she plans to roll the remaining 529 balance into her Roth.

Apparently, that's a thing you can do now?
https://www.forbes.com/sites/kellyphillipserb/2023/02/15/you-can-roll-your-529-plan-to-a-roth-ira-beginning-in-2024

 

[bloom2708]

Is your daughter the owner or are you the owner?

There is an owner and a beneficiary.

I think if the 529 has been open for 15 years, then the owner can roll it to their Roth IRA. But maybe the beneficiary is in the mix too.

 

[gcgang]

Wow! Great info.

But there’s a maximum of $35,000 that you can roll, and you can only convert the annual IRA contribution each year ($6,500 currently).

I assume if you do this you can’t also make a “regular” Roth (or regular IRA) contribution also for that year?

 

[Kork13]

Congrats on raising a financially adept young adult -- BRAVO!!!

As the linked article highlights, this is a brand new option, and a fantastic one IMO. One of the best things about it is that it can encourage making smart, economical choices with higher ed. If you find a way to get through college on the cheap (scholarships, jobs, college choice, etc.), you'll be able to take any excess funds in your 529 & drop it into a Roth IRA to get a headstart on wealth building. Especially if the 529 was started when the student was a child, this can be done upon graduation for the immediate gratification of seeing the benefit of your smart choices. Just note the max lifetime limit of $35k on 529-->Roth IRA transfers.

I love this!

 

[Morgan22]

It's a good option to have if you've overfunded a 529. But I don't think I would overfund on purpose to have the option to do this. But to each his own.

See FI Tax Guy's take on this for more details. https://fitaxguy.com/secure-2-0-529-to-roth-ira-rollovers/

 

[HenryD]

Congrats on raising a financially adept young adult -- BRAVO!!!

As the linked article highlights, this is a brand new option, and a fantastic one IMO. One of the best things about it is that it can encourage making smart, economical choices with higher ed. If you find a way to get through college on the cheap (scholarships, jobs, college choice, etc.), you'll be able to take any excess funds in your 529 & drop it into a Roth IRA to get a headstart on wealth building. Especially if the 529 was started when the student was a child, this can be done upon graduation for the immediate gratification of seeing the benefit of your smart choices. Just note the max lifetime limit of $35k on 529-->Roth IRA transfers.

I love this!

Our situation is a case study in why this rule is a good one. A lot has changed since the account was set up, including me not being married to her mom anymore. That radically impacted account funding, scholarships, etc.

DD made the decision to go cheaper before this rule and was looking to hold some back for grad school, or life long learning. I'm so proud of her.

She'll have $15-20k so the limit won't be an issue. She'll just be able divert more funds to something pre-tax during the conversion years.

 

[HenryD]

Is your daughter the owner or are you the owner?

There is an owner and a beneficiary.

I think if the 529 has been open for 15 years, then the owner can roll it to their Roth IRA. But maybe the beneficiary is in the mix too.

DD is the beneficiary and it's her Roth it'll be rolled into. The account is over 15 years old, but we did change the owner from her grandfather to her mom at distribution time. Hopefully, that didn't reset the clock or DD might have to wait a few years.

 

[4legsgood]

I think these conversions are limited per year to normal Roth contribution per year amount, and take up the Roth contribution, so not more Roth 'space'. That is, current limit is 6500, it would take six years to convert $35,000 from a 529 plan to a Roth IRA. Starts in 2024. I guess if you have good investment options in your 529, could be worthwhile.