529 to Roth conversion

[karlameyer]

Hello.  I have been taking money out of my child's 529 plan to pay for her college expenses.  All of the withdraws are for qualified expenses.  My understanding is that I do not need to report any of that on my taxes, just keep records.

Now I want to convert part of the 529 plan to a Roth, following the rules of the Secure 2.0 Act.  Does the same logic apply to this situation?  As long as I am following the rules of the Secure 2.0 Act, then I don't need to include this transaction anywhere in my taxes, just keep records.  Is that correct?  Thanks.

[DaveF1006]

Yes, but there are certain restrictions that apply. Here's what you need to know about the new 529-to-Roth rollover provision:

• The 529 plan must be open for at least 15 years.
• The lifetime limit for the rollover is $35,000 per beneficiary.
• The Roth IRA must be in the name of the beneficiary of the 529 plan.
• Any contributions made within the past five years (and earnings on those contributions) are ineligible to be moved into the Roth IRA.
• The annual limit on the rollover is the IRA contribution limit for the year, less any other IRA contributions.
  • For example, the current IRA contribution limit is $6,500. If the beneficiary made any IRA contributions, the rollover amount must be reduced by those contributions. Therefore, if the beneficiary contributed $2,000 to any IRA, the amount available for rollover is $4,500.
  • Consequently, getting to the $35,000 lifetime limit may take more than five years.
• The rollover must be a plan-to-plan or trustee-to-trustee rollover. This means you cannot take a check from the 529 plan to deposit into the IRA.
• The beneficiary is not subject to income limitations to contribute to a Roth IRA. For example, even if the beneficiary's income is over $153,000 (if single), the beneficiary can make a rollover from the 529 plan to the Roth IRA.

The beneficiary must have earned income, and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit. Therefore, if the beneficiary is not working, no rollover is available because there is no earned income.

The New 529 Rollover Rules

[maglib]

@karlameyer  the new rules on converting from a 529 to a Roth do not take place till 1/1/2024. It is in the link provided by the TT Expert.

Do also note there is no reason to take the money out of the 529 where it would stay growing tax free and then can be used for any relatives secondary education expenses and as an inheritance vehicle would be a better bet as no 10 year rule on 529 plans but, monies can transfer at any time to a very loose interpretation of a relative.

[shire]

- For the 5 year holding that period... if I moved $ from Child 1 to Child 2 would that be considered a new contribution (I'm assuming yes, but I am the owner and the funds have been in the system for over 5 years.

-How do you calculate the rollover? .... If I have 4000$ with the last contribution in 2019 with interest of 3$/year (let's say 16$ total) should I only rollover 4000-16=3984$?

And in order to rollover 3984$ to a Roth IRA child would need to have that much earned income, correct?

A work place retirement account it seems would not be a true Roth IRA so no subtractions would be needed, are there other loop holes that could come into play... workplace retirement contributions?

Also - current state plan was set up ... the company overseeing  has changed hands ... the current operator only has records since 2014 but I have canceled checks from 2009, is this going to be a huge hassle? 

Thank you.

[maglib]

@shire   Still a grey area but, so far it is not a new contribution. 

Funds cannot be moved from a 529 plan into a Roth IRA without incurring penalties and taxes unless the account has existed for at least 15 years.

Accountholders and beneficiaries cannot roll over any contributions or earnings on contributions made in the last five years. In other words, the money transferred must have been in the account for at least five years, and the amount can’t exceed your balance from five years prior.  So do not look at earnings, it is the balance from 5 years ago capped.

tax and penalty-free rollovers to Roth IRA retirement plan accounts.  

Note that the beneficiary must have earned income equal to at least as much as the amount transferred in any year.

You can only transfer up to the annual limit each year. You could transfer $7,000 for the 2024 tax year (you have until Tax Day 2025 to make a 2024 contribution).

 it’s not yet clear if all states will treat these rollovers as a qualified expense for state income tax purposes. Not all states follow the federal definition of qualified expenses for 529 plans, and in states that don’t, there could be state tax penalties caused by a 529 to Roth IRA rollover. Some states will need to to update their laws to include these rollovers as a qualified expense, others may choose not to do so.

Do note there is no reason to rush this as leaving the funds in a 529 allows you so much flexibility and you can change beneficiary to any relative at any point in time.  It still grows tax free.  You can fund a grandchild with the funds in the future. Plus from an estate status, there is no 10 year rule to withdraw all the funds.  It can effectively continue to grow.

[Cristina M]

Saving for College "529 to Roth IRA" article by Jeff White posted Jan 16, 2025 has a link to state by state info regarding deductibility of 529 to Roth rollovers.  Note that rollovers to Roths are NOT considered contributions so they can not be recharacterized if needed - see IRS website on retirement plan FAQs for mre details. 

The 529 plan administrator will provide a 1099-Q showing the trustee-to-trustee distribution (in my  case that came from Illinois' Bright Start) but I can find no guidance within TurboTax or at this community forum as to how to enter the info as anything other that stating it is for a qualified expense.   Would appreciate some advice here (another post "529 Rollover to Roth in 2024" cites the same issue).

Per IRS instructions for Form 1099-R pages 2 and 23, the 529 rollover to Roth will be reported as Box 10 on Form 5498 (just as would any normal contribution).  This should come from the institution managing the Roth but of course those forms typically don't get released until May, after the tax filing date.

[KrisD15]

For tax year 2024:

According to the IRS:

• “A Roth IRA for the benefit of the same beneficiary, if the distribution is a direct trustee-to-trustee transfer from a QTP account that has been open for more than 15 years and the amount distributed does not exceed total contributions (and attributable earnings) made to the QTP more than 5 years before the distribution date. However, this doesn't apply to the extent the amount distributed when added to other amounts contributed to Roth IRAs exceeds the annual contribution limit. For more information about contributions to Roth IRAs, see Pub. 590-A.”
• “Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions.”