529 to Roth Rollovers

Beginning in 2024, SECURE 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 aged 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 for 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 to penalties upon withdrawing the funds for non-qualified 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 amounts of money that can be rolled over--potentially leaving a significant amount left in the 529 plan to be subject to penalties. That removes the incentive for taxpayers to fully fund the 529 plan. There's also a lengthy waiting period, so that taxpayers must keep the money tied up in the 529 plan before they're able to complete the rollover.

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Bloink: The 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. 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, this provision kills two birds with one stone by removing one potential roadblock to 529 plan use and adding a retirement savings boost.

Byrnes: 529 Plans are funded with after-tax dollars--as are Roth accounts. We should be looking toward a rule that allows a 529 plan beneficiary to seamlessly transfer unneeded 529 plan funds into the Roth IRA without limits, assuming that they never need the funds to pay for education-related expenses.

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Bloink: By their nature, 529 plans are not geared toward retirement savings. That’s why the new rule allowing for limited Roth rollovers is so limited. Congress is trying to strike a balance in order to continue encouraging taxpayers to use 529 plan funds to cover the ever-rising cost of education in this country.

Byrnes: Yes, we do want to create restrictions on the uses for Section 529 plan dollars. I see no reason why retirement in lieu of education wouldn’t be a valid use if the beneficiary actually never needs the money to pay for education expenses. Capping the ability to withdraw at near-retirement age would be a better solution than this very-limited Roth rollover option.