A WAY TO JUMP-START 529-TO-ROTH ROLLOVERS

By Ian Berger, JD
IRA Analyst
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@theslottreport

We have covered in The Slott Report the new SECURE 2.0 provision that allows unused 529 plan funds to be rolled over to Roth IRAs. It originally appeared that this new rule was to be effective for 2024. However, the IRS has now said that rollovers done before April 15, 2024 can count as Roth IRA contributions for tax year 2023 if the 529 beneficiary has not already maxed out on his 2023 IRA contribution limit.

As background, the new SECURE 2.0 provision contains a number of restrictions. The total rollover amount cannot exceed a lifetime maximum of $35,000, and that limit is not indexed for inflation. The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner. The 529 plan must have been open for more than 15 years, and rollover amounts cannot include any 529 contributions (and earnings) made in the preceding five-year period.

529-to-Roth IRA rollovers are considered Roth IRA contributions, so they count towards the annual IRA contribution limit. This means that a full $35,000 529-to-Roth IRA rollover would take several years to complete. Any other IRA contributions (traditional or Roth) made for the same year would reduce the amount of the 529-to-Roth IRA rollover available.

But can a beneficiary who has not already maxed out on the 2023 IRA contribution limit for 2023 do a 529-to-Roth IRA rollover by April 15, 2024? In other words, can a 529-to-Roth rollover done before April 15, 2024 count as a 2023 contribution?

SECURE 2.0 is not clear on this, but the law does say that the new rule is effective for 529 distributions made after December 31, 2023. It does not say that it is effective for tax years beginning after December 31, 2023. Based on this language, the IRS added the following to its 2023 1099-R instructions:

“A [529] distribution made after December 31, 2023, and before April 15, 2024, that is rolled over to a Roth IRA by April 15, 2024, and designated for 2023 would be reported as a Roth IRA contribution for 2023.”

So, a 529 distribution made in 2024 and rolled over before April 15, 2024 can count as a tax year 2023 IRA contribution. This means that if you are a 529 beneficiary and you haven’t already made IRA contributions for 2023 up to the $6,500 limit, you still have time to do a 529-to-Roth rollover in an amount equal to the unused part of the $6,500 limit. Just make sure the custodian knows to report this as a 2023 contribution. Better yet, if you do a rollover before April 15 that counts as a 2023 contribution, you can also do a second rollover in 2024 that counts as a 2024 IRA contribution.

https://www.irahelp.com/slottreport/way-jump-start-529-roth-rollovers

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