topic California - 529 to Roth Rollover - Taxable Amount in Education

California - 529 to Roth Rollover - Taxable Amount

Rob-S — Thu, 30 Jan 2025 07:29:49 GMT

Federal Tax - My understanding is that there is no need to report the information on my 1099-Q which shows the trustee-to-trustee transfer for the rollover of my son's 529 to his Roth. The rollover complies with all of the requirements. I assume that there is no entry required in TT for this 1099-Q.

California - CA does not comply with the Federal law for 529 to Roth rollovers. TT offers the opportunity to enter the distribution amount near the end of the step-by-step interview when a 529 distribution is used for this purpose. However, it specifies to enter the distribution amount, suggesting the entire distribution amount ($7,000 in my son's case). This seems incorrect, as I assume that CA should treat the distribution as a non-qualified distribution which would mean that one only need enter the earnings portion of the distribution, as only the earnings should be subject to income tax and to the related 2.5% non-qualified withdrawal penalty. For example, if my son had taken a non-qualified distribution of $7,000, only the earnings would have been subject to the tax and penalty (although the Federal return would have been affected by doing so).

Does anyone have any clarity on my situation? Does a TurboTax professional have any advice?

I'll probably reach out to the FTB on this, but CA is a mess from a taxes standpoint...

Re: California - 529 to Roth Rollover - Taxable Amount

AmyC — Thu, 30 Jan 2025 23:28:43 GMT

Yes, CA taxes the income but under the rules of a ROTH. Here are the reporting requirements. In 2024 Instructions for Schedule CA (540) | FTB.ca.gov states: Special Rules for Certain Distributions from Qualified IRC Section 529 Tuition Plans – The federal Consolidated Appropriations Act (CAA), 2023, allows qualified Internal Revenue Code (IRC) Section 529 tuition plans that have been maintained for 15 years to rollover to a Roth Individual Retirement Arrangement (IRA) without a tax or penalty. Under the federal law, rollover distributions from an IRC Section 529 plan to a Roth IRA after December 31, 2023, will be treated in the same manner as the earnings and contributions of a Roth IRA. California law does not conform to this federal provision. Rollover distribution from an IRC Section 529 plan to a Roth IRA is includible in California taxable income and subject to an additional tax of 2½%. For more information, see Schedule CA (540) specific line instructions in Part I, Section B, line 8z.

Re: California - 529 to Roth Rollover - Taxable Amount

Rob-S — Fri, 31 Jan 2025 00:35:03 GMT

Thank you for your response.

So is the entire rollover taxable (basis and earnings) or just the earnings?

In Schedule CA (540) Instructions it says: For California purposes, enter the rollover
distribution amount from an IRC Section 529 plan to a Roth IRA that was
excluded from income for federal purposes on line 8z, column C.

The amount that was excluded from income on the Federal side would have been the earnings.

What are your thoughts?

Re: California - 529 to Roth Rollover - Taxable Amount

AmyC — Fri, 31 Jan 2025 01:08:10 GMT

Yes, The normally taxable portion is just the earnings. Right after I answered you, I did the entry work. Please see my explanations and how to enter it here.

Great thinking!