It’s now 2024, and the Safe 2.0 Act’s 529-to-Roth IRA switch choice is formally stay and out there to taxpayers. Nonetheless, the IRS has but to supply any kind of detailed steering on the principles that can apply to those rollovers.

Whereas permitting taxpayers to execute tax- and-penalty-free rollovers from 529 plans to Roth IRAs might be extraordinarily useful for taxpayers who don’t find yourself needing the faculty financial savings funds, the small print are at all times necessary. Whereas some points have been addressed squarely by the regulation itself, we proceed to await steering on some necessary points from the IRS — which means that shoppers ought to tread rigorously when figuring out the best way to interpret sure guidelines.

529-to-Roth Transfers: The Fundamentals

Underneath the Setting Each Group Up for Retirement Enhancement (Safe) 2.0 Act, starting with the 2024 tax 12 months, taxpayers are formally permitted to roll Part 529 plan {dollars} right into a Roth IRA if sure circumstances are met. The choice might be significantly helpful in conditions the place the plan’s beneficiary doesn’t attend school or is ready to fund their training with scholarships and different kinds of assist.

For the rollover to be permitted, the Part 529 plan will need to have been maintained for not less than 15 years. Moreover, any 529 plan contributions made within the prior 5 years can’t be rolled into the Roth IRA. That features earnings on any contributions that have been made within the 5 years main as much as the rollover. 

The Roth IRA contribution limits for the 12 months of the rollover additionally apply. In different phrases, the utmost {that a} taxpayer might roll over from the 529 plan to the Roth IRA in 2024 is $7,000 ($8,000 for these aged 50 and older), which means that rollovers of extra 529 plan funds could must be achieved over a interval of years. It’s additionally necessary to keep in mind that the beneficiary who’s executing the rollover should then have earned earnings for the 12 months (or years) by which the rollover is made.

Because the regulation is written, the 529 rollover replaces the taxpayer’s IRA contribution for the 12 months (i.e., there’s one single $7,000 restrict for 2024 — not a $7,000 restrict for direct contributions and a $7,000 restrict for 529 plan rollovers).

Additional, probably the most {that a} taxpayer can ever transfer from a 529 plan right into a Roth IRA is $35,000 over the course of the taxpayer’s lifetime. Every year, Roth rollovers are restricted to the distinction between the quantity transferred and any common or Roth IRA contributions made throughout that 12 months. The rollovers are usually not topic to the earnings restrictions that forestall sure high-income taxpayers from contributing on to a Roth IRA.