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February 24, 2023 at 10:33 AM
Beginning in 2024, Secure Act 2.0 will permit taxpayers to roll Section 529 plan dollars into a Roth IRA if certain conditions are met. For the rollover to be permitted, the 529 plan must have been maintained for at least 15 years.
Additionally, any 529 plan contributions made in the prior five years cannot be rolled into the Roth IRA (including earnings on contributions that were made in the five years leading up to the rollover).
The Roth IRA contribution limits for the year of the rollover also apply, so the maximum that a taxpayer could roll over from the 529 plan to the Roth IRA in 2023 is $6,500 ($7,500 for those 50 and older). The maximum that a taxpayer can ever move from a 529 plan into a Roth IRA is $35,000 over the course of the taxpayer’s lifetime. The Roth IRA that receives the excess 529 plan funds must also be maintained in the name of the 529 plan beneficiary.
We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the new rules allowing taxpayers to roll unused 529 plan funds into a Roth IRA.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Bloink
Byrnes
Their Reasons:
Bloink: This new option will go a long way toward encouraging taxpayers to participate in valuable tax-preferred 529 savings accounts. Perhaps the primary deterrent for taxpayers who are saving for college education expenses is the idea, or fear, that their child may not end up going to college — or may never need the funds to pay for qualifying education expenses — because if that’s the case, the saver becomes subject to penalties upon withdrawing the funds for nonqualified expenses.
Byrnes: The new 529-to-Roth rollover option won’t do much to encourage additional college savings. As drafted, the law simply imposes too many limits. First, there are significant limits on the amount of money that can be rolled over — potentially leaving a significant amount in the 529 plan to be subject to penalties.
