Ask Terry Questions 529 Plan & ROTH IRA rollover – Secure Act 2.0 – Limitations

529 Plan & ROTH IRA rollover – Secure Act 2.0 – Limitations

By Terry Savage on January 22, 2024 | College Savings / Student Loans

Hi Terry,

I’m writing about an issue I encountered when I tried to transfer unused funds in a 529 account to a ROTH IRA, per the recently enacted Secure Act. I am the owner of the 529 account, which has been open for 18 years.

The Scholar Share 529 (CA plan) agent explained that the plan conversion applies to the Beneficiary only, who must also be the Owner of the Roth account. My current beneficiary does not yet have a retirement account, and does not anticipate using the college funds.

I asked if I could change the beneficiary to either myself or another qualified relative who has a Roth account. I was told that changing the beneficiary would trigger the opening of a new account and reset the calendar on the 15-yr requirement for the Roth conversion.

Either the language in the Secure Act does not go far enough (and the 529 Plans have found the loophole to keep funds in their programs), or the 529 Plan administrators do not have it right.

Which is it? I thought the Secure Act was intended to create flexibility in unused college funds; this clearly isn’t happening.

Terry Says

Well, the advisor was completely correct. The idea is to leave the money in there, growing tax-deferred, until your child starts earning money. Then you can do a yearly conversion of up to $35,000 in assets from the plan into a ROTH IRA for your child (up to the yearly maximum, assuming he has earned income in that amount).

If you have another child, you could switch beneficiaries without any hassle. But then your child could not do the conversion.
Or you could withdraw the money and pay a 10% penalty and ordinary income taxes on the gains.

BUT the best solution is to leave it in there for now. You never know if your child might decide to go on to graduate school. Or he/she could leave it growing and use it for your grandchild!

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