529 conversion and wages for contribution
Taxpayer had excess funds in 529 plan, of $2500. Since 529 had been open for more than 15 years, the $2500 was rolled into Roth account. Additionally, in same year, taxpayer earned $1500. and would like to contribute to Roth. I am finding conflicting information about proceeding. One source says, yes, since $2500 plus $1500 is below the annual $7000 limit, the additional $1500 can be contributed. Another source says the contribution and rollover are limited to the $1500 earned income. Which is accurate?
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-07 14:47
The latter.
The earned income can be used for regular Roth contributions or for 529 rollovers, but the same income cannot be used for both.
For example, if earned income was 5000, 2500 of that could be used for the 529 rollover and the other 2500 for a regular Roth IRA contribution.
Permalink Submitted by Marion Katz on Fri, 2025-03-07 15:15
So, in my example, the conversion of the 529 actually represents an overfunding of the Roth, right? Wages were only $1500 and the conversion was $2500.
Permalink Submitted by Alan - IRA critic on Fri, 2025-03-07 15:29
Yes, there is a 1000 excess Roth IRA contribution that must be removed.
If the 529 rollover was done this year but was assigned as a 2024 contribution, it could be reapplied as a 2025 rollover, if there might be more earned income in 2025. In that case, the Roth custodian will have to make the change by 4/15/2025.