Among the most-discussed provisions of the Secure 2.0 Act passed in 2022 involved the ability to roll over funds from 529 college savings accounts to a Roth individual retirement account.
This pathway took effect for 2024, but according to planning experts Ed Slott and Jeff Levine, the jury is still out on the technique's acceptance — and just what difference it will make in the financial lives of wealth management clients.
On the one hand, the ability to move funds from a 529 plan to a Roth IRA should give people added peace of mind about “committing” funds to meet future education costs that may never come to be. This can mean that a plan's beneficiaries do not attend college or are able to fund their education with scholarships and other aid.
But there are also limits on the amount of the rollover, as well as requirements around the minimum amount of time that the 529 plan has been in existence. In addition, as with other tax-advantaged accounts, there are penalties if the money is drawn early as ordinary income.
Levine and Slott explore this dynamic in the latest episode of their podcast series, "The Great Retirement Debate." During the episode, they discuss the intricacies of the 529-to-Roth conversion rules, concluding that the new strategy has both big promise and big regulatory questions that remain to be answered.
As such, the approach remains relatively untested by financial planners.
Basic 529 to Roth IRA Rollover Rules
A beneficiary of a Section 529 qualified tuition program is now permitted to roll over a distribution from the account to a Roth IRA if certain requirements are met.
The rollover amount cannot be more than the Roth IRA annual contribution limit (currently $7,000), and the rollover must be made from a Section 529 account that has been open for more than 15 years.
Another rule to keep in mind, Levine and Slott said, is the $35,000 lifetime limit on rollovers for any given beneficiary. Given that the annual limit for Roth IRA contributions is a fifth of that amount, hitting the limit will require multiple years of coordinated rollovers.
As Slott emphasized, such distributions must be paid in a trustee-to-trustee transfer to a Roth IRA maintained “for the benefit of the designated beneficiary.” That is, the 529 plan account and the Roth IRA must have the same owner-beneficiary.
Ambiguity Remains
There is still a lack of regulatory clarity, Slott noted, around how the 15-year duration rule applies in cases where a beneficiary is changed on an account.
Consider cases in which clients end up not needing to pay for their child’s college education, and they want to help that child get a jump-start on retirement savings. They could plan several years of rollovers into a Roth account created in that child’s name. No problem.
