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Roth IRA Distribution Rules ApplyĬonversions from a 529 plan are subject to the Roth IRA distribution rules. A conversion that meets these requirements would be nontaxable. The 529-to-Roth conversion amount for all years is capped at $35,000. However, while a 529-to-Roth conversion is subject to a regular Roth IRA contribution limit, it is not subject to the MAGI limits that apply to regular Roth IRA contributions. Roth modified adjusted gross income limit does not apply: Individuals can make a regular contribution to a Roth IRA only if their modified adjusted gross income, or MAGI, is below specific amounts. It appears that the compensation requirement and limitation apply, which means that a 529-to-Roth conversion can be done only by an individual with eligible compensation for the year-such as wages and self-employment income-and the converted amount cannot exceed the eligible compensation received for the year. The maximum amount that may be converted from a 529 plan to that individual’s Roth IRA is $5,500 ($6,500 minus $1,000). The amount converted from a 529 plan for a year, when added to any contribution made to a traditional and Roth IRA, cannot exceed the IRA contribution limit in effect for the year.Įxample: Assume that the regular IRA contribution limit for 2024 is $6,500.Īssume a regular contribution of $1,000 was made to the owner’s traditional IRA or Roth IRA for 2024. Observation: This is unlike Roth conversions, which can also be done as indirect conversions, where the amount is paid to the Roth IRA owner, who then has 60 days to deposit the amount to the Roth IRA.Īnnual Limit Subject to Regular IRA Contribution Limit It is anticipated that the IRS will issue tax-reporting requirements to ensure that Form 1099-Q-used to report distributions from 529 plans-properly shows that the transaction was done as a direct conversion to a Roth IRA and, therefore, is nontaxable. At the request of Tom Jones or any other responsible party, XYZ would make the funds payable to: ABC Custodian, for the Benefit of Tom Jones Roth IRA (or similar variation). Assume the beneficiary’s (person for whom the 529 is maintained) name is Tom Jones. It is done as a direct conversion by paying the amount directly from the 529 plan to the Roth IRA.Įxample: Assume that the 529 Plan is held with XYZ Custodian and the Roth IRA with ABC Custodian.It does not include any amount that has not aged at least five years in the 529 plan.Must Be a Long-Term 529 Plan and Directly TransferredĪ 529-to-Roth conversion would be tax-free if it is done from a 529 plan that has been maintained for at least 15 years at the time of the conversion and the following requirements are met: But this works only if the conversion meets the requirements of Secure 2.0. These 529 Roth conversions would take on the characteristics of a conversion from a traditional IRA to a Roth IRA, and attributable earnings, therefore, would be tax-free once the Roth IRA owner is eligible for a qualified distribution from the Roth IRA. Secure 2.0 allows for qualified rollover contributions (Roth conversions) of limited amounts from long-term 529 plans to Roth IRAs. Roth Conversions of Qualified Amounts From 529 Plans Therefore, unlike a 529 plan, for which distributions are generally tax-free if used to cover qualified education related expenses, all a Roth IRA owner needs to qualify for tax-free earnings is to wait until they reach age 59 and a half and have funded a Roth IRA for at least five years.
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But with a Roth IRA, the earnings are tax-free if distributed as part of a qualified distribution. Secure 2.0 provides a tax-free solution to this taxability by allowing up to $35,000 of qualifying excess 529 plan funds to be converted to Roth IRAs.īoth 529 plans and Roth IRAs are funded with already taxed amounts. In addition, the 10% additional tax on any distribution of earnings would be owed unless an exception applies. The earnings portion included in distributions of those excess amounts would be subject to ordinary income tax.
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