Did you know your child may be able to convert some of their 529 plan assets into a Roth IRA? Here’s how it works:
General Rules
- The rollover must be paid through a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of the beneficiary.
- The rollover amount for a year cannot be more than the Roth IRA annual contributions limit, and all such rollovers for the individual’s lifetime cannot exceed $35,000. Ie, they need to have earned income in the year they roll it over.
- The rollover must be from a section 529 account that has been open for more than 15 years.
- The distribution cannot exceed the aggregate amount contributed to the program (and earnings attributed to the amount contributed) before the 5-year period ending on the date of the distribution. This means that only older contributions qualify.
Benefit
The main benefit is for your child to get a jump start on saving for retirement by using one of the most tax efficient accounts.
Questions Still Lingering
Since this is a newer tax law change, all of the nuances are still being figured out, such as the impact of changing the beneficiary, whether there are income limitations (which doesn’t appear to be the case), and how to accurately separate earnings from older contributions versus newer contributions.