Ed Slott: 529-to-Roth IRA Rollover Is No Planning Panacea

The new provision in the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act allowing unused 529 plan funds to be rolled into Roth IRAs, which becomes effective in 2024, includes “lots of limitations,” according to IRA and tax expert Ed Slott of Ed Slott and Co.

“I think advisors got the wrong idea — that you could roll over hundreds of thousands of unused 529 plans [funds] to Roth IRAs,” under Secure 2.0, Slott told ThinkAdvisor Monday in an interview.

Slott relayed that during two recent virtual programs he conducted for advisors on Secure 2.0, the 529-to-Roth rollover option prompted the most questions from participants.

“It’s a great provision, but there are so many limitations it’s hardly of use,” Slott said.

For example, “the [529] account has to be in existence for 15 years,” Slott relayed.

Advisors who have clients “with relatively small 529 balances can use this [provision] to transfer the 529 funds to Roth IRAs over several years — limited overall to $35,000, not $35,000 per year,” Slott explains.

The “biggest misunderstanding” that advisors have, according to Slott, “is that even those who qualify by getting over all the hurdles, still cannot roll the entire $35,000 in one year. It’s good, but of more limited use than most advisors realize, once they see all the limitations.”

Other “obstacles” to a rollover, Slott said, include:

• The rollover must go to the beneficiary’s Roth IRA.
• The amount that can be rolled over per year is subject to the IRA contribution limit, which is $6,500 for 2023 — in other words, it would take years to hit the $35,000 limit.
• Contributions must be in the account for at least five years before they are eligible for rollover. “Congress doesn’t want a revolving door — that is, moving funds that were never intended for education into a Roth,” Slott says.