And because of the 5 year waiting rule on 529->Roth rollovers, you have to make the last contributions about the time they graduate high school (or wait until the 3rd or 4th year of their career, which also works fine probably).
Has that been determined, or is that still up in the air (per the discussion above)? I mean, we started off those 529s 20 years ago -- couldn't we just say that we're withdrawing from the oldest contributions while leaving the rest in until later? Sort of how you can specify oldest vs. newest shares in some kinds of stock transactions.
The 5 year waiting rule is part of the law. From the PDF above on page 858:
"does not exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the 5-year period ending on the date of the distribution"
The above language is a restriction which is required to be met in order to get the favorable tax treatment in the new law.
So you're fine as long as, after you make a 529->Roth rollover, the remaining 529 balance is equal to or greater than the total of contributions and earnings in the previous 5 years. That's how I understand the language, anyway.
My comment that you quoted and are replying to was assuming that the 529 custodian (parent or grandparent) was drawing down the 529 to near empty, which happens to be true for my situation but I now realize isn't necessarily universally true.
Man, this is why I do not do tax law. English major + lawyer, and I still cannot make sense out of this.
(i) IN GENERAL.—In the case of a distribution from a qualified tuition program of a designated bene- ficiary which has been maintained for the 15-year period ending on the date of such distribution, subparagraph (A) shall not apply to so much the portion of such distribution which—
(I) does not exceed the aggregate amount contributed to the program (and earnings attributable thereto) before the 5-year period ending on the date of the distribution
I'm assuming Para. A refers to taxable consequences/penalties for nonqualifying withdrawals. So (i) is saying that you don't trigger taxes and penalties if you meet the requirements in (I).
(I) is what kills me. So the withdrawal can't exceed the total contributed prior to the 5-year period before the withdrawal? Say you started the 529 on 1/1/05, and you want to do the Roth rollover on 1/1/25. The language in (I) seems to say that the amount I take out on 1/1/25 cannot exceed the total value of the account as of 1/1/20. ("aggregate account contributed . . and earnings attributable thereto" = total value of account, not considering any withdrawals during the 2005-2020 timeframe).
That sounds to me like they're basically saying you can't take out anything you put in (+ associated earnings) from 1/2/20-1/1/25. But you can do the rollover as long as the amount you take out is less than the total value of the account as of 1/1/20. Which seems to be the opposite of what you're saying?
I'm neither an English major nor a lawyer, so imagine how I struggle! ;-)
I agree with you that the intent of the language you quoted is to explain what amounts are eligible for a 529->Roth rollover. The section seems to be describing both what makes it a qualified withdrawal (and thus not subject to taxes and the 10% penalty and any state tax clawbacks) and makes it eligible to be contributed to the beneficiary's Roth.
I think the intent of the language is to establish a rolling five year waiting period. The target audience of the law is parents who in good faith saved up for their kids' college in a 529 up through high school, and then discovered during the college years that they are in an somewhat overfunded situation. It is trying to minimize people funding the 529 accurately and then stuffing the account during the college years as a sideways way of funding the kids' Roth.
I've reread what I wrote and what you wrote, and they seem to be saying the same thing, not opposite things. Maybe an example or two will clarify:
You open a 529 for your kid on 1/1/05 with $10,000.
On 1/1/20, the account has grown to $20,000.
On 1/1/21, you add $5,000 to the account.
On 1/1/23, the account has grown to $28,000. You move the account to cash.
On 1/1/25, your kid has a job and will earn at least $7,000 from work in 2025.
So on 1/1/25, under this law, you can move $7,000 directly to the kid's Roth from the 1/1/05 contribution and earnings. On 1/1/25, the 1/1/21 contribution of $5,000 plus associated earnings is still off limits because it hasn't seasoned for five years.
On 1/1/26, assuming your kid still has a job, you could move another $7,000. This would also come from the 1/1/05 contribution and earnings. Now the 1/1/21 contribution and earnings are also available, but you haven't used up the 1/1/05 contribution and earnings yet.
Ditto 1/1/27.
On 1/1/28, you move the final $7,000 and empty the account. If we're doing FIFO, this obviously comes at least in part from the 1/1/21 contribution and earnings. But that's OK, because it has been seven years since that contribution was made, so the 5 year rule is still met.
...
Now the above example doesn't include actually paying for college in there anywhere. Suppose a similar set of facts as the first example:
You open a 529 for your kid on 1/1/05 with $10,000.
On 1/1/20, the account has grown to $20,000.
On 1/1/21, you add $5,000 to the account.
On 1/1/23, the account has grown to $28,000. You move the account to cash.
On 1/1/24, you use $21,000 of the account to pay for tuition for their senior year. The account now has $7K.
On 1/1/25, your kid has a job and will earn at least $7K from work in 2025.
In this scenario, even if you want to, you can't move that $7K that is remaining in the 529 to the kids' Roth on 1/1/25, even though there is $7K left in the 529 and they have earned income to qualify for a 529->Roth rollover. That is because in this scenario, assuming FIFO, the $21K distribution on 1/1/24 used up the 1/1/05 contribution and earnings. The $7K that is left is at least partly from the 1/1/21 contribution and earnings, so it hasn't met the 5 year rule yet.
...
The law, as you can see, is very compactly written. It leaves a lot of questions to be answered, probably by IRS regulations yet to be written.
Again, I think the intent of the law is to help parents and others who have funded a 529 while the kid was growing up, used it during college for 529 expenses, and then ended up with some overfunding that otherwise would be taxed and possibly penalized as a non-qualified withdrawal if not for this new law.
I think the new law does assume FIFO even though it doesn't spell that out. It might assume other things, which might conflict with how states have implemented their 529s - I'm not sure on that, though.