529 Plan to Roth IRA Transfers

Posted by John Posey

As part of the SECURE Act legislation that passed in 2022, 529 plan beneficiaries will be eligible to transfer their 529 funds to a Roth IRA starting in 2024 – within certain parameters outlined below.

Requirements:

• 529 plan transfer to a Roth IRA is subject to the annual IRA contribution limit ($6,500 in 2023)
• The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan
• The beneficiary must have compensation
• The maximum lifetime transfer is $35,000 per beneficiary (no indexing feature for inflation at this time)
• The 529 plan must have been maintained for 15 years or longer
  • Unclear how a change in beneficiary would affect this rule
  • Establishing and maintaining 529s to start the 15-yr clock is a wise consideration
• Any contributions to the 529 plan within the last 5 years are ineligible to be transferred to a Roth IRA
• 529 contributions and earnings go into the Roth IRA in like-kind – in other words, contributions are treated as basis and become immediately accessible with no tax or penalty per Roth IRA rules. Earnings may be subject to tax and penalty if the owner is under 59 ½ years old.

 This new law creates a couple of new planning opportunities worth noting:

1. To the extent a child doesn’t exhaust or need the entire value of their 529 plan for higher education, a transfer to a Roth IRA in their name is possible once the account has been in existence for more than 15 years and they have compensation (up the IRA limit each year, not exceeding the lifetime max of $35k). This feature provides a great opportunity to reward individuals who earn financial aid, scholarships, etc., and/or are economical with their higher education costs. Additionally, Roth IRAs are more practical to take distributions from than other types of IRAs – distributions up to the value of contributions (i.e. – basis) are never subject to tax or penalty providing more practical access and flexibility with the money.
2. Another strategy would involve setting up a 529 plan for yourself (owner & beneficiary) to allow the ability start funding a Roth IRA after meeting the 15-year hold requirement on the 529 plan at which point a transfer of 529 funds to a Roth IRA is allowed (up to the applicable annual IRA limit, lifetime max of $35k). This second option could be great for those who are beyond the income phaseout limits to make Roth IRA contributions and/or who have multiple IRAs that make the “back-door” Roth IRA strategy (See Can I Make a Backdoor Roth IRA Contribution? for more info) unpractical or impossible. Furthermore, the individual could change the beneficiary to a child for higher education expenses if needed down the road. (Quick sidenote – it doesn’t work well to change the beneficiary from yourself to a grandchild as a change to a new beneficiary two or more generations younger than the replaced beneficiary can be expected to trigger generation-skipping tax - AKA GST).

These new rules create some unique flexibility with 529 plan dollars to keep in mind as you or someone you know considers college funding and tax-advantaged savings options. 

Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness.  All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.