The ability to roll money out of a 529 plan into a Roth individual retirement account provides financial planning flexibility to people who want to save for their children's education but are unsure if the funds will actually be needed.
The pathway is seen by many financial advisors as one of the most useful provisions of the retirement legislation known as the Secure 2.0 Act, according to Robert Bloink and William H. Byrnes, the professors behind ThinkAdvisor’s Tax Facts. However, as the duo discussed on a recent ThinkAdvisor webcast (now available on demand), there is still significant uncertainty as to how the rollovers are to be managed — despite becoming legal in 2024.
That’s why the pair is eager to see the Internal Revenue Service provide answers to a few questions left ambiguous in the text of Secure 2.0. Primarily, these involve the minimum amount of time that a 529 plan must be in operation to qualify for the rollover, along with the lifetime limit on the total amount of rollovers in cases where a client has multiple beneficiaries.
Washington watchers say there is little clarity about if or when the IRS will issue such guidance, especially given the broader policy environment early in the second Trump administration. In the meantime, the professors agreed, advisors and their clients will likely remain somewhat cautious about enacting such rollovers.
A Welcome Development
This new option, Bloink said, "will go a long way" toward encouraging taxpayers to participate in tax-preferred 529 savings accounts.
“Perhaps the primary deterrent for taxpayers who are saving for college education expenses," he added, "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.”
If that’s the case, the saver becomes subject to penalties upon withdrawing the funds for nonqualified expenses. Thus, a pathway to “redeploy” the assets penalty-free into a tax-advantaged retirement account for the benefit of their children (or other beneficiaries) is a big deal.
Not only does the rollover pathway prevent surcharges and tax penalties, it also represents an opportunity for parents to supercharge a child’s retirement savings journey in the case that they are able to self-fund their education via scholarships or choose a different route besides higher education.
What We Do Know
The basics of the 529-to-Roth conversion pathway are relatively straightforward, the professors explained. Secure 2.0 permits 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 apply as normal, and the maximum that a taxpayer can 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.
According to Bloink and Byrnes, the Roth IRA contribution limits for the year of the rollover also apply. In other words, the maximum that a taxpayer could roll over from the 529 plan to the Roth IRA in 2024 and in 2025 is $7,000 ($8,000 for those ages 50 and older). This means that rollovers of excess 529 plan funds may need to be accomplished over a period of years.
It’s also important to remember that the beneficiary executing the rollover must have earned income for the year (or years) in which the rollover is made, thanks to a quirk in the previously existing Roth IRA tax framework. Furthermore, as the law is written, the 529 rollover replaces the taxpayer’s normal IRA contribution for the year.
What We Don’t Know
As the professors explained, it isn’t clear whether the $35,000 “lifetime limit” on 529-to-Roth rollovers will be indexed to inflation. Likewise, it isn’t clear whether the limit is applied on a per-beneficiary basis or if it applies to each funding taxpayer.
“For example, the IRS has not provided any guidance on whether a parent who funds 529 plans for two children would be entitled to roll over a maximum of $35,000 or $70,000 — $35,000 per beneficiary,” Bloink observed. “The 15-year qualification period has also generated questions.”
This is because taxpayers who maintain Section 529 plans are permitted to change the account beneficiary. However, the IRS has not clarified how the 15-year period is calculated when the taxpayer opts to change beneficiaries.
“It is unclear whether a new 15-year waiting period will be required starting from the date the beneficiary is changed, or whether the period that began on the date the account was opened will be transferred,” Bloink said. “We do know that when the funds are ultimately withdrawn from the Roth IRA, they’re treated as though they came from another Roth IRA.”
In other words, the same ordering rules will apply in determining whether the earnings on the amounts can be taken tax-free and penalty-free while considering the five-year rule.
The Bottom Line
"This rollover option gives taxpayers the peace of mind to know that they won’t be subject to penalties and will be able to reinvest the funds to help their child or chosen beneficiary save for retirement,” Bloink concluded. “It also gives taxpayers a motive for starting their child or grandchild out on the right retirement savings path with the Roth IRA funding option.”
In the end, the professors agreed, this provision removes one potential roadblock to 529 plan use and adds a retirement savings boost — remembering that the Roth IRA that receives the excess 529 plan funds must also be maintained in the name of the 529 plan beneficiary. So, the parent who funds the 529 savings plan on behalf of a child cannot simply roll the funds back into their own retirement plan.
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