Help with 529 to Roth conversion, medallion signatures, and hostile brokerages

[Bear Stache]

Hi all,

I wasn't sure if this is the right forum for this question, but I'll give it a shot. Quick summary:

Son has a 529 account that has about $64k that he won't use. It's currently at Capitol Group, and is in their shitty American funds (high fee, high load). We set it up over 20 years ago, long before we knew better. I would like to roll some of that money out of there, and into his Roth at TD Ameritrade (soon to be Schwab). Thanks to Secure Act 2.0, this is theoretically possible. He has earned income, and the account is older than 15 years, so he should be able to transfer $7k a year. Here's where it starts going off the rails....

Capitol Group requires a Medallion signature on their form in order to transfer the funds out of the account. They won't provide the signature for funds leaving their company. I called both TD Ameritrade and Schwab, and neither of them will provide a medallion signature on any form that isn't theirs. So, it's a hard no from them. My bank (Arvest) only provides Medallion signatures for their wealth management clients. Hard pass on that, I'll keep my 1-2% fee and buy more VTI. I can't find an institution that is willing to provide a medallion signature for this transfer form from Capitol Group, so it seems like I can't get this moved. Capitol Group doesn't want to help me move assets out of their control, and nobody else seems interested. What should I do? At this point, I'm tempted to tell him to eat the 10% penalty and just do a normal, non qualified distribution. We've paid over $10k in fees on a $64k account, so Capitol Group is really milking this account hard. I think in the long run, he would be better off to move it to low fee investments.

Thought or advice on how to get this done? Or if we should just eat the 10% penalty and be done with it, and invest the rest in VTI at a brokerage that doesn't suck?

[Bear Stache]

Update: May have a solution with Merrill Lynch/Bank of America. I'm supposed to meet with them next week to discuss, I'll post a follow up if this pans out.

[reeshau]

Can't you go to an Ameritrade or Schwab office to do this? Seems straightforward.

Also, if you still otherwise would have use for 529 funds, you can roll that over to another 529 custodian, too.  Then, at least it isn't about the fees in the fund.

[Bear Stache]

Hi Reeshau,

I called both TD and Schwab to ask if they would do it, before I drove to their office (nearest office is 100 miles away). Both flatly refused to stamp any form that was not their form. It was a hard no from both.

Regarding rolling over the account to a different brokerage, I'm hesitant to risk doing that. One of the requirements for converting 529 accounts over to Roth IRA is that the 529 account must be at least 15 years old. I've been unable to find out for sure if rolling the account to a different broker resets that 15 year clock or not. I'm not willing to risk it until I can find written guidance from the IRS on the question if rolling the account resets the clock or not.

I'm hopeful that Merrill Lynch will work with us on this. I meet with them next week. If so, I plan to move the existing Roth over to them, from Schwab. So far, I'm not impressed with the customer service at Schwab.

[secondcor521]

Personally:

I would not do a non-qualified distribution.

I would probably call them back and ask them who their state or federal regulators are and explain that I would be filing complaints tomorrow morning with everyone and their mother if they maintain a ridiculous requirement of a medallion guarantee.  You are already presumably the account custodian with credentials which are presumably sufficient for a qualified withdrawal.  Since a 529->Roth rollover is treated legally as a qualified withdrawal from the 529, the authentication requirements should be the same for both.

I would also rollover the 529 to a new custodian with better investments, lower fees, and better customer service, because I don't think the IRS regulations will consider such a rollover to break the 15 year requirement.  But I understand your reluctance on that point.

Good luck.

[travel2020]

I'm hopeful that Merrill Lynch will work with us on this. I meet with them next week. If so, I plan to move the existing Roth over to them, from Schwab. So far, I'm not impressed with the customer service at Schwab.

I had the same experience with Schwab, but BOA/ML was able to do the medallion guarantee a couple of years ago when I needed it for Treasury Direct.

As I recall, the banker had mentioned they only do it for their customers. YMMV.

[Catbert]

If BoA/ML doesn't work out maybe try Fidelity if they have a service center nearby.  Obviously that would involve using Fidelity as your new brokerage rather than Schwab.

I'm with Secondcor521 going scorched earth on this with filing complaints.  They've tried to set up a Catch-22:  they require that you use their form but won't do the medallion signature and no one else wants to touch that form.

[Scandium]

I'm hopeful that Merrill Lynch will work with us on this. I meet with them next week. If so, I plan to move the existing Roth over to them, from Schwab. So far, I'm not impressed with the customer service at Schwab.

I had the same experience with Schwab, but BOA/ML was able to do the medallion guarantee a couple of years ago when I needed it for Treasury Direct.

As I recall, the banker had mentioned they only do it for their customers. YMMV.

I some sort of verified signature for my Treasury Direct account once and walked into a bank, who I do zero business with, and they did a signature for me (might have been $20?). I don't know if that's the same though? I think the bank was capitol 1, but not sure?

[achvfi]

My credit union offers Medallion services as long as you are a member.

Membership needs are to open an account with at least 1 dollar. Check with your local credit union.

[Bear Stache]

I wanted to follow up on what happened with this tale. Merrill Edge/Bank of America was able to help us out with the Medallion Signature, so we transferred my son's Roth IRA to Merrill Edge from Schwab (since Schwab was no help whatsoever. Schwab basically came back with a hard no when we approached them for help). We were then able to transfer $7000 worth of shares in-kind to his new Roth at Merrill Edge from the old 529 account at Capital Group. We'll do this for the next 4 years until we hit the $35k limit on this type of transfer.

I was very happy with the customer service at Merrill... they really did the whole thing without me having to babysit the process. We did have to sign one extra form, mostly because the 529 to Roth process is new and all the brokerages are figuring it out. But anyway, Merrill/BOA handled it with no extra work needed on my part.

While my son's IRA isn't that big, I'm inclined to move my accounts from Schwab, based on their lack of interest in working with me. Merrill was a lot more willing to help my son out, which impressed me. Your mileage may vary, but that was my experience in this case. BOA and Merrill were very accommodating regarding the Medallion Signature.

[MustacheAndaHalf]

I've done numerous transfers of IRA assets, and I'm most confused by you starting the transfer at the place that will be losing your money.  They don't have much of an incentive to move quickly - to lose your business faster.

What has worked for me - at Schwab - is filling out forms to transfer assets into Schwab.  They might need a recent account statement, and then Schwab contacts my old brokerage to handle the transfer.

I've also done numerous transfers into non-brokerage accounts (SDIRA), and the same process played out.  I fill out the transfer form at the firm receiving my money.  They need an account statement for where the money comes from, and they handle making the transfer.

There's also a process called an "ACATS" transfer that moves cash, stocks, ETFs, funds and maybe even options from one firm to another.  That might be worth considering.

My main advice would be to start the transfer at the firm receiving your money next time.

[Bear Stache]

Thanks for the advice, MustacheAndaHalf, but I actually called Schwab for help with this, and they gave me a hard no, despite my having over 1M with them. I wasn't impressed. Admittedly, I was asking for the Medallion signature, but I explained why I wanted it and what I wanted to do with regard to transferring the funds from a 529 to a Roth. They could have volunteered the exact same advice that you just gave me, but they didn't. They didn't even try. At least Merrill took the time to listen to me and make it happen. I'll probably move my accounts (or at least some of them) to Merrill as a result.

While I think your advice in general is  good, my experience with Schwab in this case was not. Why didn't they say "just fill out the forms with us, and we'll take care of it for you"? As an aside, I enjoy reading your perspectives on a lot of the posts in this forum, and in general agree with you. I'm just not impressed with the customer service at Schwab, but I do appreciate your reply and advice, and I'll keep it in mind for next time.

[MustacheAndaHalf]

Thanks for the advice, MustacheAndaHalf, but I actually called Schwab for help with this, and they gave me a hard no, despite my having over 1M with them. I wasn't impressed. Admittedly, I was asking for the Medallion signature, ...

You called Schwab to sign Capital Group forms, which is the opposite of my suggestion.

While I think your advice in general is  good, my experience with Schwab in this case was not. Why didn't they say "just fill out the forms with us, and we'll take care of it for you"? As an aside, I enjoy reading your perspectives on a lot of the posts in this forum, and in general agree with you. I'm just not impressed with the customer service at Schwab, but I do appreciate your reply and advice, and I'll keep it in mind for next time.

Up above, you said you would not rollover assets owing to concerns with IRS rules for 529 accounts (the 15 year waiting period).  If you won't open an account at Schwab, they can't help you.  If you ask Schwab to interpret IRS rules, they cannot provide tax advice.  I assume this is where things went wrong - you asking for tax advice in order to do the rollover, and them not providing it.

I would prioritize you getting an interpretation of the 529 rules.  I found a for-profit company with a FAQ that may be helpful:

"How can I find my account creation date?

If the account was rolled over to my529 from another 529 plan, the Call Center can provide the date the account was opened at my529, but the account owner must consult their own records or contact the original 529 plan for the initial account creation date."
https://my529.org/secure-act-2-0/

[Bear Stache]

Apparently I've done a poor job of summarizing my conversation with Schwab, resulting in confusion over what was said. None of that really matters now though, so there's not really any point in further discussion...my immediate problem has been resolved, and you've given me good, actionable advice for next time. I appreciate it!

[travel2020]

We were then able to transfer $7000 worth of shares in-kind to his new Roth at Merrill Edge from the old 529 account at Capital Group. We'll do this for the next 4 years until we hit the $35k limit on this type of transfer.

@Bear Stache - Since you have $64k and can only transfer $35k max to a Roth over multiple years, have you looked into moving the rest ~$29k to a different 529 plan now (fidelity, etc.)? Would save you from paying the unnecessary high fees at Capital Group for the next several years.

[Bear Stache]

Hi Travel2020,

I've thought about it, and believe me, I would love to move that account now, but I consider it risky at this point. One of the requirements to do this conversion is that the 529 account must be 15 years old, and nobody is sure whether or not a transferred account is a "new" account, or the old account at a new brokerage. Does it reset the 15 year clock? So far, the IRS hasn't issued any guidance on that. Once they give us some clarity on that question, I can proceed with certainty, but for now, I'm playing it safe and leaving it at Capitol Group, even though it pains me to do so, because there's no question about how old the account is there.

As soon as we get guidance that says it's OK, or we hit the 35k limit, I plan to transfer whatever is left to a quality brokerage house (and I think Fidelity is an excellent choice). It sucks to potentially pay the fees for another 4 years, but it would also suck to have to wait 15 more years to make this move. I'm more of a "sooner rather than later" guy, so I'm transferring what I can now. But yes, as soon as I get guidance telling me I can do so, I'm moving whatever is left in that account ASAP. One of the problems with educating yourself about finances is that you can facepalm yourself for things you did in the past before you knew better (ie., American funds and their 5% front load fee.... Ugh!). But better late than never. I'm very grateful for the wealth of knowledge that exists on this forum. Thank you all!