529 for everyone

[jad56061]

Can you explain all the rules for the 529 for old funds for Secure 2.0 act section 126? Would this be a loophole for someone who is not going back to school for a retirement account and earnings grow tax free?

[KimberW]

The IRS What's New for 2023 section of Publication 590-A has a great summary. I've copied it below.

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Qualified tuition program rollover to a Roth IRA. Beginning with distributions made after December 31, 2023, a beneficiary of a section 529 qualified tuition program is permitted to roll over a distribution from the section 529 account to a Roth IRA for the beneficiary if certain requirements are met.

• The rollover must be paid through a trustee-to-trustee transfer.

• The rollover amount cannot be more than the Roth IRA annual contributions limit.

• The rollover must be from a section 529 account that has been open for more than 15 years.

The distribution is paid in a direct trustee-to-trustee transfer (rollover) to a Roth IRA maintained for the benefit of the designated beneficiary. The distribution cannot exceed the aggregate amount contributed to the program (and earnings attributed to the contributed amount) before the 5-year period ending on the date of the distribution. A 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.

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The annual distribution from a 529 plan to a Roth IRA cannot exceed the normal Roth contribution limit for each year. (Currently $7,000 for 2024.) 

The lifetime maximum that can be moved from a 529 plan to a Roth IRA is $35,000.

The distribution from a 529 plan to a Roth IRA cannot be more than the contributions (plus earnings attributed to those contributions) made BEFORE five years preceding the date of the distribution.  In other words -- you can't move "recent" contributions from a 529 plan to a Roth IRA. The funds being moved have to be at least five years old. 

(Source for the details above are from the amended code in sub-section (c)(3)(E) of 26 U.S. Code § 529 - Qualified tuition programs -- currently only visible in the Notes section of that tab.)

Earnings on the amounts would be tax-free, yes. But the lifetime maximum of $35,000 may not make it much of a loophole for effective retirement savings.

[TeriH]

Great question!

It indeed could be viewed as a loophole for getting money into a retirement type account.  However, remember, you can't get it out for 15 years without penalty.  

If your goal is purely retirement savings, a 401k via employer, SEP if self employed, or IRA year contributions is a better vehicle.  

[jad56061]

Fantastic! It's more so wanting to know if it's worth contributing.

BUT, it seems like the part that sucks is any contribution or earnings made from years 10-15 can't be used. Am I right on that?

[KimberW · Accepted solution]

But that five-year period would roll forward ...

Assume a 529 Plan set up in 2010, contributions were made annually from 2010-2024

First Roth conversion could theoretically happen in 2025 (when the 529 plan is 15 years old) but can only access contributions+earnings from 2020 or earlier (money must be at least five years old)

Roth conversion in 2026 could access money from 2011 or earlier

Roth conversion in 2027 could access money from 2012 or earlier

Etc.

(Note -- these dates would be actual DATES ... a plan set up on Aug 1, 2010 is 15 years old on Aug 1, 2025)

[jad56061]

Super helpful thank you!