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New 529-to-Roth IRA Conversion Rule

The new 529-to-Roth IRA conversion transfer may be advantageous to many 529 account holders.   Taking effect in 2024, Section 126 of the SECURE 2.0 Act introduced special rules allowing distributions from 529 plans to Roth IRAs. Several limitations must be considered when converting a 529 plan to a Roth.

• The 529 plan must have been in existence for at least 15 years.
• The total amount of money converted is limited to $35,000 per beneficiary.
• The conversion will count towards the annual Roth IRA contribution limit. (But there is no upper income constraint.)
• You cannot convert contributions that have been made within the last five years, or earnings associated with those recent contributions.
• If you change the beneficiary of your 529 plan, the 15-year clock will restart.

The following real-life example illustrates the current limitations

 When Alex was just a wee lad, his parents opened a 529 plan for him. When he graduated high school in 2015, contributions to the account ceased. Alex went to college and upon graduation, his 529 plan still had a balance which remained invested in the plan’s age-based portfolio.

Beginning in 2024, when the new rule becomes effective, Alex will be able to begin funding his own Roth IRA with the remaining 529 funds in a direct trustee-to-trustee transfer. To qualify, each transfer must be handled by the 529 plan administrator and sent directly to his Roth IRA custodian. Because his account was established at least 15 years ago and no contributions have been made within five years of the first transfer in 2024, the only limitation he needs to be concerned with at this point is the annual Roth IRA contribution limit.

Assuming the Roth IRA contribution limit in 2024 remains at $6,500 and Alex has at least $6,500 in earned income in 2024 (and has made no contributions to a traditional IRA), he may initiate a rollover of $6,500 from his 529 to his Roth IRA. The upper income limits for Roth IRA contributions do not apply.

Alex may continue to perform rollovers each year up to the maximum Roth IRA contribution limit until he has reached a total of $35,000 in rollover dollars or his 529 account is exhausted.

If you have any questions, feel free to contact us at Acumen.

The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.   It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To learn more visit https://www.journalofaccountancy.com/news/2023/mar/saving-college-new-529-to-roth-irs-transfer-rule.html

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