Converting 529 to Roth

Forum|Forum|1 year ago
April 7, 2024
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Rolled over $6,000 from 529 to Roth. It met all of the requirements. The problem is that the adjusted gross income is greater than $153,000. Using Turbo Tax the software says "Your Income Is Too High to Contribute." My understanding is that doing a roll over from a 529 is exempt from the restrictions on income. Not sure how to deal with this one.

maglib

Employee

@Smith Iowa This provision takes effect in 2024, not 2023. Sadly many were not aware of the dates.

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.

-The rollover amount from a 529 plan into a Roth IRA account will be subject to the Roth IRA annual contribution limits set by the IRS. The annual Roth IRA contribution limit for 2023 is $6,500 ($7,500 for those age 50 and older). For 2024 this goes up to $7,000 ($8,000 for age 50 and older).

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

-There’s is a $35,000 lifetime limit per beneficiary for 529 plan rollover contributions to Roth IRAs. Remember, you can’t transfer all $35,000 at one time. You can only transfer up to the annual limit each year. For example, if you have $16,500 in your account, you could transfer $6,500 for the 2023 tax year (you have until Tax Day 2024 to make a 2023 contribution), $7,000 in 2024, and the remaining $3,000 in 2025. Tax and penalty-free transfers can only be made, though, if you meet the requirements.

-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. Changing designated beneficiaries also will likely restart that 15-year clock.

-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.

-While Roth IRA contributions are subject to annual limits, when rolling over from a 529, they’re not subject to the typical Roth IRA income limits. This means those with incomes exceeding Roth IRA income limits can contribute to a Roth IRA by rolling over unused funds from a 529 plan when they’d otherwise be ineligible to contribute.

-the transfer must be a trustee to trustee transfer

https://www.journalofaccountancy.com/news/2023/jul/the-new-529-rollover-roth-ira.html

To steer clear of the 6% tax, file a withdrawal request. Contact your financial institution and request to withdraw the excess contribution, plus earnings, by the due date of the return (including extensions).

The earnings are included as taxable income for the year the excess contribution was made.

Related Information:

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Smith IowaAuthor

@maglibI am confused. In the second paragraph of you reply it says "For example, if you have $16,500 in your account, you could transfer $6,500 for the 2023 tax year (you have until Tax Day 2024 to make a 2023 contribution)"

Doesn't that contradict that the provision starts in 2024?

maglib

Employee

@Smith Iowa sorry was just copying the rules for roth limitations totals rules. Secure Act 2.0 is applicable on 1/1/2024. Did you click on the AICPA Journal of Accountancy link I left as it has a great in depth article.