Another consideration for leftover money in a 529 Plan is transfers to other family members .
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BY LAWRENCE PON , CPA / PFS
CPAs and SECURE 2.0
What to Know About 529 Rollover to Roth IRA sECURE 2.0 ( Act ) was signed into law on Dec . 29 , 2022 , as part of the Consolidated Appropriations Act ( CAA ) of 2023 and builds on the retirement reforms in the Setting Every Community Up for Retirement Enhancement ( SECURE ) Act of 2019 . While there are more than 90 new retirement plan provisions in SECURE 2.0 , this article will focus on one of the provisions that has the most interest among CPAs and clients .
529 Rollover to Roth IRA One of the new provisions in the Act is the 529 rollover to a Roth IRA . Many of our clients have leftover money in their 529 plans after their children finished college . You can count me among them !
My daughter graduated from college in 2021 , so her college experience was interrupted by COVID-19 . Starting in March 2020 , the remainder of her college years were spent in her bedroom at home . And because her internship in Washington , D . C . was cancelled , she had virtual internships that summer . We watched her graduation on YouTube .
Her tuition costs did not change during that time , but there were no more housing costs . Also , the stock market kept going up until 2022 , so that also helped increase the value of her 529 account . Accordingly , we have money leftover in the 529 Plan .
Here ’ s what you need to know about this new provision : 1 . It takes effect in 2024 , not 2023 . 2 . The 529 Plan must be open for at least
15 years . 3 . The lifetime limit for the rollover is
$ 35,000 . 4 . The Roth IRA must be in the name of the beneficiary of the 529 Plan .
5 . Any contributions made within the past five years ( and earnings on those contributions ) are ineligible to be moved into the Roth IRA .
6 . The annual limit on the rollover equals the IRA contributions for the year , less any other IRA contributions . a . For example , the current IRA contribution limit is $ 6,500 . Also , if the beneficiary made any IRA contributions , the rollover amount must be reduced by any contributions . Therefore , if the beneficiary contributed $ 2,000 to any IRA , the amount available for rollover is $ 4,500 .
7 . The rollover must be plan-to-plan or trustee-to-trustee . This means you cannot take a check from the 529 Plan to deposit into the IRA .
8 . The beneficiary is not subject to income limitations to contribute to a Roth IRA . For example , if the beneficiary ’ s income is more than $ 153,000 ( if single ), the beneficiary can rollover from the 529 Plan to the Roth IRA .
Another consideration for leftover money in a 529 Plan is transfers to other family members .
9 . The beneficiary has to have earned income and the amount that can be rolled over is the lesser of earned income or the IRA contribution limit . a . If the beneficiary is not working and they are done with college , no rollover is available because there is no earned income .
Tax Planning Consideration How about taking advantage of this provision for a newborn ?
I am a big fan of 529 plans . I opened plans when my children were born and made monthly contributions . For example , when I get Form 1099Q for the 529 distributions to pay for college costs , the earnings portion was about half of the total distribution . This means the cost basis is my money , and the rest of the college costs were paid by the market taxfree . It ’ s like a discount on the cost of college .
Of course , not everyone ’ s experience is the same . Too often clients try to time the market — and that never works . There were a few clients where the basis was higher than the distribution due to making lump sum contributions when the share prices were high .
The power of the 529 comes with the tax-free growth by taking advantage of dollar cost averaging .
When a client has a new child , I always recommend they open a 529 Plan and encourage friends and family to make contributions You can also encourage grandparents to take advantage of the Super 529 . This is a special provision that allows anyone to contribute five years of the annual gift exclusion amount into the 529
16 CALIFORNIA CPA JULY 2023 www . calcpa . org