Overfunded 529 Plan? Consider a Roth IRA Rollover

A new law effective in 2024 permits 529 money to be rolled into a Roth IRA. However, there are rules and limits to consider.

Column distributed by Hearst Connecticut Media Group.

Links to resources referenced:

• Public Law 117-328, 117th Congress
  • https://www.govinfo.gov/content/pkg/PLAW-117publ328/pdf/PLAW-117publ328.pdf
  • Related column excerpt:
    • “The 529 Roth IRA rollover is new for 2024, enacted as part of the SECURE 2.0 Act (signed into law at the end of 2022.”
• 529 College Savings Plans Network
  • https://nast.org/wp-content/uploads/secure-2.0-cspn-letter-to-treasury-re-roth-ira-rollovers-09.12.23-final76.pdf
  • Related column excerpt:
    • “(Note: Tracking may be an issue. ‘529 Plans are not required under existing law to track the information necessary to determine what portion of earnings in the account are attributable to contributions made five years or more prior to the date of distribution,’ according to a letter sent to the IRS by the Nebraska assistant state treasurer on behalf of the College Savings Plans Network.)”  
• Amount of Roth IRA contributions that you can make for 2024
  • https://www.irs.gov/retirement-plans/plan-participant-employee/amount-of-roth-ira-contributions-that-you-can-make-for-2024
  • Related column excerpt:
    • “The beneficiary is not subject to an income limitation, in contrast to a contribution an individual can make on his own into a Roth IRA. (This is different from the general rules for a Roth IRA. Under those rules, for example, a single person who has a modified adjusted gross income of $161,000 or more in 2024 cannot contribute to a Roth IRA.)”
• Fidelity: How unused 529 assets can help with retirement planning
  • https://institutional.fidelity.com/app/item/RD_9916548/how-529s-can-help-with-retirement-savings.html 
  • Related column excerpt:
    
    • “At this time, it is unclear whether there is an earned income requirement that applies to Roth contributions. That is, if the beneficiary did not earn $7,000 in 2024, can he roll over $7,000 from the 529 to the Roth? See Fidelity’s
    • ‘How unused 529 assets can help with retirement planning.’” 
• IRS: Instructions for Forms 1099-R and 5498 (2024)
  • https://www.irs.gov/instructions/i1099r#:~:text=Effective%20with%20respect%20to%20distributions,checkbox%20in%20box%207%20checked
  • Related column excerpt:
    • “However, the IRS has noted on its ‘Instructions for Forms 1099-R and 5498 (2024)’ webpage that the rollovers ‘are reported on Form 5498 as Roth IRA contributions and not as rollover contributions.’”
• Fidelity: Withdrawals – 529 College Savings Plan
  • https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/withdrawals-529-college-savings-plan.pdf
  • Related column excerpt:
    • “If you are considering a 529 rollover, you will need a form from the trustee of your 529 account. You can see an example at Fidelity of a Fidelity Investments form for a 529 account transfer to an account outside the Fidelity system.”
    • “The form includes a cautionary paragraph that is worth noting: ‘It is your responsibility to ensure that your withdrawals comply with IRS requirements. Non-qualified withdrawals could trigger IRS fees or penalties. At the end of each tax year, Fidelity will send a 1099-Q to the IRS, and to the participant or beneficiary, reporting any withdrawals. You may want to consult a tax advisor.’”
• The Tax Adviser: ‘A retirement savings head start: 529-to-Roth rollovers’
  • https://www.thetaxadviser.com/issues/2024/jul/a-retirement-savings-head-start-529-to-roth-rollovers.html
  • Related column excerpt:
    • “Another resource is The Tax Adviser article “A retirement savings head start: 529-to-Roth rollovers.’”