New 529 to Roth Options

Submitted by Kevin O'Hearn on Wed, 2024-02-07 17:02

Hello,

With respect to the new 529 to Roth transfer allowance put in place by SECURE 2.0. We know that the annual transfer amount cannot exceed the annual IRA contribution limits.

Do you interpret that the funds transferred from the 529 to Roth under the rules would be treated as regular contributions to the Roth where the Roth owner could withdraw those amounts at any time with no consequences regardless of age or whether the 5-year holding period has been satisfied? Basically are these 529 to Roth transfers treated as basis in the receiving Roth?

Thank you.



Submitted by Alan - IRA critic on Wed, 2024-02-07 21:29

  • Partially. A 529 transfer to a Roth IRA consists of a pro rata share of the 529 contributions and their earnings. For example, if a 100k 529 plan consists of 70k of contributions and 30k of earnings, then 70% of the amount transferred is treated as regular Roth IRA contributions and the rest Roth gains. A 7000 transfer would then include 4900 of contributions to be treated as regular Roth IRA contributions, and 2100 will be treated as Roth IRA earnings. As has been the case, the Roth owner must track their own Roth IRA basis, and in doing so they would consider the 5498 Box 10 reported Roth contributions.
  • But the Roth custodian will be reporting the entire 7000 in Box 10 as regular Roth IRA contributions. While this enables the IRS to determine if the Roth contribution limit is observed, neither the IRS nor the taxpayer will know the actual breakdown of the Box 10 reported contribution. The 529 custodian will likely have to transfer the breakdown to the Roth custodian and maybe the taxpayer so the taxpayer can track their new Roth basis, but IRS oversight will be difficult. The IRS will have to clarify the form of data that the 529 custodian will have to provide. 

Submitted by Kevin O'Hearn on Wed, 2024-02-07 21:59

Thanks Alan. What if there are contributions and earnings in the 529 that are less than 5 years old? Since those amounts are not eligible for rollover, would those amounts be disregarded from the determining which portion of the rollover to Roth is basis vs. earnings?

Submitted by Kevin O'Hearn on Thu, 2024-02-08 00:08

Sorry Alan but I forgot to ask one other thing. Second question…..the SECURE 2.0 makes reference to a “qualified rollover contribution.” In the event of one of these from a Roth 401k to a Roth IRA, the rollover is not treated pro rata (basis and earnings), right? The entire rollover is now treated as basis in the receiving Roth IRA. Is it possible these 529 transactions could be treated as qualified rollovers where the pro rata treatment wouldn’t apply? If the pro rata should apply here, it seems they are treating these as Non-qualified rollovers?

Submitted by William Tuttle on Thu, 2024-02-08 00:39

  • There are countless unanswered questions about this and so many other SECURE Act 2.0 provisions.
  • I can’t see any Roth IRA custodian accepting rollovers from 529 accounts until the IRS issues guidance.
  • Until then, everyone will just have to wait.

Submitted by Alan - IRA critic on Thu, 2024-02-08 01:07

Submitted by Kevin O'Hearn on Thu, 2024-02-08 16:58

Thanks Alan for the explanation. Would you agree that the portion of the 529 that is rolled over that represents the contributions would be treated as basis in the Roth IRA and can be withdrawn before age 59 ½ / 5-year window?

Submitted by Alan - IRA critic on Thu, 2024-02-08 17:47

Yes, regular Roth IRA contribution basis, not conversion basis.

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