529 to Roth IRA rollover
Client mistakenly rolled over more that the annual limit (i.e. $7,000) from a 529 to a Roth IRA
How do you correct this excess?
Thank you
Client mistakenly rolled over more that the annual limit (i.e. $7,000) from a 529 to a Roth IRA
How do you correct this excess?
Thank you
Permalink Submitted by Alan - IRA critic on Fri, 2025-02-21 11:00
Not clear, due to lack of IRS guidance on this and several other issues with this rollover provision. Because the Roth custodian must report the full amount of the rollover on Form 5498 as a regular Roth IRA contribution, an excess contribution is created.
If the excess is distributed, it is not clear how it could be returned to the 529. It can’t be rolled back but perhaps it could fund a new 529 contribution.
This will also affect Roth IRA basis. For example, if the 529 distribution was 10k of which 40% was 529 gains, then Roth IRA basis is increased by 6000 prior to removal. If the excess 3000 is removed, then the increased Roth IRA basis drops to 4200. Any earnings in the Roth IRA on the excess prior to removal will be taxable in the year the 529 to Roth rollover was completed. The Roth owner would likely also have the option of paying the excise tax on the 3000 excess and absorbing that amount in the following year by not making 3000 of eligible Roth contributions or rolling over only 4000 from the 529 in the following year.