529 to Roth IRA Transfers: A New Backdoor Roth Contribution Strategy Is Born

Michael Ruger - Greenbush Financial Group

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With the passing of the Secure Act 2.0, starting in 2024, owners of 529 accounts will now have the ability to transfer up to $35,000 from their 529 college savings account directly to a Roth IRA for the beneficiary of the account. While on the surface, this would just seem like a fantastic new option for parents that have money leftover in 529 accounts for their children, it is potentially much more than that. In creating this new rule, the IRS may have inadvertently opened up a new way for high-income earners to move up to $35,000 into a Roth IRA, creating a new “backdoor Roth IRA contribution” strategy for high-income earners and their family members.
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Опубликовано:

6 авг 2024

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Комментарии : 8

@TheK9Shepherd 5 месяцев назад

Man out of all the internet videos out there about retirement/401k/roth/IRA/529/etc... yours are the most articulate and easy to understand !!

@alphamale2363 Год назад

This is the best presentation I have seen on this topic. Thanks.

@syedabdullah8371 Год назад

Hi! Would you mind me editing your RU-vid Video Thumbnails?

@binhvong5297 Год назад

Is there any annual maximum contribution on 529? If not, doesn't this circumvent the annual Roth contribution limit of $6500 (if you have the intention of eventually converting the 529 to Roth)?

@greenbushfinancialgroup Год назад

Each state has different max funding limits but with all of them you also have to be aware of the annual gifting limitations. If you are funding for the sole purpose of this Roth conversion strategy you also don’t want to overfund it too much because of the $35,000 lifetime maximum 529 to Roth IRA transfers. But the beneficiary change ruling will be interesting, if they allow beneficiary changes without the 15 year reset, you could potentially keep changing the beneficiary on the 529 to fund various Roth accounts. It will be interest to see if the IRS addresses this in their guidance. (Comment is for education. Not advice)

@kylelaw7210 Год назад

My understanding is you can withdraw Roth IRA contributions (not gains) without tax or penalty after having it in there for 5 years. Hypothetically if I put $17k in a child’s 529 and it grew to $35k over the next 15 years and was then converted to a Roth IRA over the next 6 years. And then let it sit/grow for another 5 years, could you take the $35k contribution out tax free?

@greenbushfinancialgroup Год назад

This is an estimated guess but these "transfers" from 529 will most likely be treated as "transfers" instead of "contributions". It's like when you rollover a Roth 401K into a Roth IRA. It's considered a "rollover" but the rollover maintains its split between original contributions and earnings for purposes of the tax-free withdrawal of contributions from the Roth IRA. I would assume it would be the same treatment for these transfers from 529 accounts. The transfers will carry over the contributions and earnings from the 529 into the Roth IRA account. Also the 5 year holding period for Roth IRA's only pertains to the earning piece of the Roth IRA balance, it does not apply to the ability to withdraw your contributions tax and penalty free. To withdraw the earnings tax and penalty free from a Roth IRA you have to be over the age of 59.5 AND satisfy the 5 year holding period. (Comment is for education. Not advice)

@kylelaw7210 Год назад

Thank you for the detailed answer. That makes sense. Next question, if you put $17k into a 529 plan and it grew to $52k could you take out the original $17k tax free and roll the $35k worth of growth into a Roth IRA?