529 Plans and the 5-Year Rule: Today’s Slott Report Mailbag

Thursday, November 30, 2023

By Sarah Brenner, JD
Director of Retirement Education
Follow Us on X: @theslottreport

Question:

Can you please tell me if a client can transfer her required minimum distribution (RMD) to a 529 plan for a grandchild’s college and avoid paying income tax on it similar to a transfer to a qualified charity?

Thanks,

Pat

Answer:

Hi Pat,

Unfortunately, this is not possible. There is no way to transfer an RMD to a 529 plan without taxation. The client would need to take the RMD and pay taxes on it. She could then use those funds to make a contribution to the grandchild’s 529 plan. The rules for qualified charitable distributions (QCDs) would not apply here. A tax-free QCD can only go to specifically defined charitable entities. A grandchild’s 529 plan does not fit this definition.

Question:

Hello Ed Slott Team,

The owner of an IRA dies in 2022 at age 70 with no beneficiary listed. The default beneficiary is the estate. The will states the estate will be divided equally to 4 people. The IRA goes into an inherited IRA owned by the estate. The IRA is then moved into the individual inherited IRAs. The question is…how long do the current owners have to take RMDs? Is it 5 or 10 years? I have found varying answers with a dozen tax attorneys, CFPs and CPAs. Each new IRA owner has gotten different advice.

Thank you all!!

Susan

Answer:

Hi Susan,

In this situation, the 5-year rule would apply – not the 10-year rule. This is because the estate was the beneficiary at the time of death due to the fact that no beneficiary was named, and the IRA document listed the estate as the default beneficiary. An estate is a nondesignated beneficiary under the SECURE Act, and since the IRA owner died before his required beginning date, the 5-year rule applies. The fact that during probate the IRA assets were assigned to inherited IRAs for the estate beneficiaries does not change anything.

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