I’ve heard that there’s a new option for savings in 529 plans to be rolled over to an IRA. Is this true?
The SECURE Act of 2022 — also known as SECURE 2.0 — made many changes to tax-advantaged savings arrangements. Not all SECURE 2.0 provisions took effect immediately. One new provision that takes effect in 2024 is the option for certain assets in 529 higher education savings plans to be rolled over to Roth IRAs.
Does this option apply to all assets in a 529 plan?
Unfortunately, no. Only $35,000 — total, lifetime — may be rolled over by a 529 plan designated beneficiary to his own Roth IRA. Furthermore, only an amount up to the annual IRA contribution limit ($7,000 for 2024) may be rolled over in any one year. Finally, the 529 plan designated beneficiary executing such a rollover must have earned income equal to or greater than the amount to be rolled over. It does not appear that the income restrictions that generally apply for Roth IRA contribution eligibility — the so-called phase-out ranges — apply.
Are there other restrictions besides this lifetime limit?
In addition to these limitations, the account must have been in existence for at least 15 years, and the amount to be rolled over must have been in the account for five years.
Does such a 529-to-Roth IRA rollover have any impact on my ability to make regular IRA contributions?
Unfortunately, yes. Any annual Traditional or Roth contributions made for the year reduces on a dollar-for-dollar basis the amount eligible for a 529-to-Roth IRA rollover for that year. Or vice versa.
Coverdell Education Savings Accounts can be rolled over to 529 plans. Can they, too, be rolled over to a Roth IRA?
No. SECURE 2.0 does not allow for Coverdell ESA-to-Roth IRA rollovers. However, Coverdell ESA assets that have been rolled over to a 529 plan could be rolled to a Roth IRA, if the rule requiring assets to be in the 529 account for five years has been met.
Has there been any reporting or other IRS guidance on these transactions since the enactment of SECURE 2.0?
Limited reporting guidance has been provided in the IRS’s detailed Instructions for Forms 1099-R and 5498. 529-to-Roth IRA rollover amounts are to be entered in Box 10 of Form 5498, IRA Contribution Information. Box 10 is normally used to report Roth IRA contributions, not rollovers. This seems consistent with the fact that such rollovers would offset regular IRA contributions for the year.
Additional guidance may be forthcoming.
A CBA endorsed provider, Ascensus is the industry’s leading administrator of tax-favored plans for healthcare, retirement and college savings plans for over 6 million Americans. Founded in 1975, Ascensus currently provides products and solutions for HSAs, IRAs and Employer Retirement Plans to more than 7,200 financial institutions nationwide. Our nearly 40 years of experience with retirement plans and our expertise with Health Savings Accounts since their inception nearly a decade ago is unparalleled in the industry.
