Author Topic: 529 - New Alternative to ROTH IRA for Kids?  (Read 2078 times)

Asalted_Nut

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529 - New Alternative to ROTH IRA for Kids?
« on: January 06, 2023, 10:55:58 AM »
So from what I can tell, if you want to get your children set up with a ROTH IRA type account prior to them having a paycheck it seems like you can now do so with a 529! $35k limit however, but starting in 2024 you can transfer 529 funds to a ROTH IRA for the beneficiary once they do start working (within the yearly limits).

Am I understanding that correctly? That's pretty great! I mean 529's were always pretty great but there's always that question of what a child will choose to do post HS, or what changes to financial aid might look like, so having this option for the funds is swell.

EDIT: As I read further it looks like the account has to be open, and set to the same beneficiary, for 15 years. Still, tax free for those 15 just like a roth would be!
« Last Edit: January 06, 2023, 10:58:02 AM by Asalted_Nut »

Laura33

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #1 on: January 06, 2023, 11:58:18 AM »
So from what I can tell, if you want to get your children set up with a ROTH IRA type account prior to them having a paycheck it seems like you can now do so with a 529! $35k limit however, but starting in 2024 you can transfer 529 funds to a ROTH IRA for the beneficiary once they do start working (within the yearly limits).

Am I understanding that correctly? That's pretty great! I mean 529's were always pretty great but there's always that question of what a child will choose to do post HS, or what changes to financial aid might look like, so having this option for the funds is swell.

EDIT: As I read further it looks like the account has to be open, and set to the same beneficiary, for 15 years. Still, tax free for those 15 just like a roth would be!

Yep!  It's clearly designed to remove the fears of saving too much by giving you another outlet, so the 15-year limit makes sense from that perspective.  And the transfers are limited to the annual Roth contribution limit (I am assuming they will substitute for the Roth contribution you could otherwise make and not effectively double the annual contribution about, but I haven't confirmed that). 

It's certainly another excellent option for planners with the financial resources to save more than college will cost.  I think my DD will benefit; we just emptied her 529 to pay for her last semester, but my mom's 529 still has $$ left in it.  And coincidentally, DD just got an offer for her first post-graduation job, so if we can send her off into the world with employment, no college debt, and the beginnings of a retirement account, I'm seriously going to feel like we did something right. 

YttriumNitrate

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #2 on: January 06, 2023, 12:45:43 PM »
I currently, myself and my two kids have 529 plans since I set up my plan before they were born and transferred my money into their accounts after they obtained social security numbers. These new rules have me thinking that it might be worthwhile setting up a 529 plan listing my wife as a beneficiary. Our youngest is still pre-K, so it will easily be 15+ years till we know if there's money left over. If there is, having the flexibility to roll $35,000 into my wife's Roth IRA could be useful.

Anyone else having similar thoughts?

EDIT: This new rollover law is particularly well timed as Indiana recently upped their 529 tax credit (not some measly deduction) to 20% on the first $7,500 per year (was first $5000), and the chances of us having money left over when the kids are done with school just went up.
« Last Edit: January 06, 2023, 12:49:31 PM by YttriumNitrate »

Asalted_Nut

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #3 on: January 06, 2023, 02:19:28 PM »
I currently, myself and my two kids have 529 plans since I set up my plan before they were born and transferred my money into their accounts after they obtained social security numbers. These new rules have me thinking that it might be worthwhile setting up a 529 plan listing my wife as a beneficiary. Our youngest is still pre-K, so it will easily be 15+ years till we know if there's money left over. If there is, having the flexibility to roll $35,000 into my wife's Roth IRA could be useful.

Anyone else having similar thoughts?

EDIT: This new rollover law is particularly well timed as Indiana recently upped their 529 tax credit (not some measly deduction) to 20% on the first $7,500 per year (was first $5000), and the chances of us having money left over when the kids are done with school just went up.

While I could be mistaken, as I was making this post the article I was reading said that only the beneficiary could receive the funds as a rollover, and that changing beneficiaries might cause that 15 year clock to reset. So I am not sure if you could set your wife as a beneficiary, change it to your child for any educational expenses, and then change it back to fund the ROTH.

However if you're talking about setting it up solely for the purpose of a ROTH conversation later for your wife and not for education funding for your children who have their own 529's, it could work it looks like- but 15 years is a fairly long time in terms of changes in laws and caveats and limits and such. I may be misunderstanding what you meant, of course!

YttriumNitrate

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #4 on: January 06, 2023, 06:25:43 PM »
While I could be mistaken, as I was making this post the article I was reading said that only the beneficiary could receive the funds as a rollover, and that changing beneficiaries might cause that 15 year clock to reset. So I am not sure if you could set your wife as a beneficiary, change it to your child for any educational expenses, and then change it back to fund the ROTH.
This is definitely a case where I'll need to actually read the rules and regulations rather than just somebody's interpretation of them.

Depending on the harshness of the clock reset, I could just fund mine, and my wife's, 529 plans to $35,000ish and then transfer that money over to the kids accounts if they need it for education. That way, there's been no inflow of foreign cash into our 529 plans, and no potential reset of the clock.

dabighen

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #5 on: April 07, 2023, 07:51:30 AM »
When my first three kids were born, I set up coverdells because they were slightly better and more flexible.  The new changes do not apply to them so I have to go through the conversionn nonsense.  Anybody know if congress is working to have this rule apply to ESAs as well?

Thanks,

Matt

Scandium

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #6 on: November 02, 2023, 12:41:26 PM »
While I could be mistaken, as I was making this post the article I was reading said that only the beneficiary could receive the funds as a rollover, and that changing beneficiaries might cause that 15 year clock to reset. So I am not sure if you could set your wife as a beneficiary, change it to your child for any educational expenses, and then change it back to fund the ROTH.
This is definitely a case where I'll need to actually read the rules and regulations rather than just somebody's interpretation of them.

Depending on the harshness of the clock reset, I could just fund mine, and my wife's, 529 plans to $35,000ish and then transfer that money over to the kids accounts if they need it for education. That way, there's been no inflow of foreign cash into our 529 plans, and no potential reset of the clock.

Resurrecting this, since it's the same discussion:
Did you ever find out how the 15-year rule works? I've been looking into it now.

The info from Fidelity on this states:
Quote
The 529 plan must be held for the designated beneficiary for at least 15 years.
You can change the beneficiary anytime with a 529, so is it only possibly if you don't do that for 15 years?

This uses different wording, but poses it as an open question:
https://www.voya.com/blog/savings-game-rolling-over-funds-529-plan-to-roth-ira
Quote
The 529 must have been in existence for 15 years before any rollover is allowable
It is not clear whether changing beneficiaries will cause the 15-year period to restart. This will not be determined until the IRS issues subsequent guidelines..

Perhaps this is more authoritative. I need to dig up the original source:
https://www.mtrustcompany.com/blog/secure-2-act-529-to-roth-ira-rollover
The Senate Committee on Finance summary of Section 126 reads:
“Section 126 amends the Internal Revenue Code to allow for tax and penalty free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 college savings accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.

If the senate committee says so, can we trust that? That clearly state you just need the account open for 15 years, and can change beneficiary 5 min before doing the rollover.

So then would this plan work?
  • use the 529 for kids college
  • transfer $35k to their roth
  • change beneficiary to yourself
  • roll $35k into your own Roth
  • after 5 years withdraw Roth contributions tax free

(Step 0 obviously being overfunding a 529 by a bit)

optional: repeat to roll to spouse's Roth as well?

edit: read the senate doc mentioned above, and yes it's that clear. No further info from IRS. It takes effect next year, so maybe we'll see something then, or by april 2025. Think we can call it settled for now that it's the age of the account. So my plan should work, yey
same confirmed here:
https://my529.org/what-is-the-secure-act-2-0/
« Last Edit: November 02, 2023, 12:51:20 PM by Scandium »

YttriumNitrate

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #7 on: November 03, 2023, 11:41:44 AM »
edit: read the senate doc mentioned above, and yes it's that clear. No further info from IRS. It takes effect next year, so maybe we'll see something then, or by april 2025. Think we can call it settled for now that it's the age of the account. So my plan should work, yey
same confirmed here:
https://my529.org/what-is-the-secure-act-2-0/
I'm not sure if this is the absolute final text of the bill, but it seems to at least be a version of the bill rather than just a summary.
https://www.benefitslawadvisor.com/wp-content/uploads/sites/960/2022/12/Secure-Act-2.0-extract-of-CAA-2023-1.pdf

The relevant portion appears to be on PDF pages 116/117 which state:
Quote
‘‘(i) IN GENERAL.—In the case of a
14 distribution from a qualified tuition pro-
15 gram of a designated beneficiary which has
16 been maintained for the 15-year period
17 ending on the date of such distribution,
18 subparagraph (A) shall not apply to so
19 much the portion of such distribution
20 which—
21 ‘‘(I) does not exceed the aggre-
22 gate amount contributed to the pro-
23 gram (and earnings attributable
24 thereto) before the 5-year period end-
1 ing on the date of the distribution,
2 and
3 ‘‘(II) is paid in a direct trustee-
4 to-trustee transfer to a Roth IRA
5 maintained for the benefit of such
6 designated beneficiary.

YttriumNitrate

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #8 on: November 03, 2023, 11:53:44 AM »
So then would this plan work?
  • use the 529 for kids college
  • transfer $35k to their roth
  • change beneficiary to yourself
  • roll $35k into your own Roth
  • after 5 years withdraw Roth contributions tax free

(Step 0 obviously being overfunding a 529 by a bit)

optional: repeat to roll to spouse's Roth as well?

edit: read the senate doc mentioned above, and yes it's that clear. No further info from IRS. It takes effect next year, so maybe we'll see something then, or by april 2025. Think we can call it settled for now that it's the age of the account. So my plan should work, yey
same confirmed here:
https://my529.org/what-is-the-secure-act-2-0/
Based on my quick look at the text of the bill, I still think my variant of funding the parents' 529s to $35k each, and then the rest to the kids, has a higher chance of allowing maximum Roth rollovers when the law finally gets interpreted.

Scandium

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #9 on: November 14, 2023, 08:35:44 AM »
So then would this plan work?
  • use the 529 for kids college
  • transfer $35k to their roth
  • change beneficiary to yourself
  • roll $35k into your own Roth
  • after 5 years withdraw Roth contributions tax free

(Step 0 obviously being overfunding a 529 by a bit)

optional: repeat to roll to spouse's Roth as well?

edit: read the senate doc mentioned above, and yes it's that clear. No further info from IRS. It takes effect next year, so maybe we'll see something then, or by april 2025. Think we can call it settled for now that it's the age of the account. So my plan should work, yey
same confirmed here:
https://my529.org/what-is-the-secure-act-2-0/
Based on my quick look at the text of the bill, I still think my variant of funding the parents' 529s to $35k each, and then the rest to the kids, has a higher chance of allowing maximum Roth rollovers when the law finally gets interpreted.

Schwab's newsletter advise caution. Seems like they think the IRS might interpret it either way, and they say should do the way you're doing.
https://www.schwab.com/learn/story/529-to-roth-ira-rollovers-what-to-know?cmp=em-XCS

secondcor521

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #10 on: November 14, 2023, 10:36:40 AM »
The actual text of the law is at:

https://www.congress.gov/117/plaws/publ328/PLAW-117publ328.pdf

and the relevant part starts on page 858 of the PDF.

The language around the 15 years is ambiguous and could be read either way.  The intent seems to me to be that the account should be open for 15 years for the same beneficiary (ie the college student).

The IRS has not, as far as I know, issued guidance yet, since the law doesn't go into effect until 1/1/2024, and the IRS isn't known for being speedy on this stuff.

So then would this plan work?
  • use the 529 for kids college
  • transfer $35k to their roth
  • change beneficiary to yourself
  • roll $35k into your own Roth
  • after 5 years withdraw Roth contributions tax free

(Step 0 obviously being overfunding a 529 by a bit)

optional: repeat to roll to spouse's Roth as well?

edit: read the senate doc mentioned above, and yes it's that clear. No further info from IRS. It takes effect next year, so maybe we'll see something then, or by april 2025. Think we can call it settled for now that it's the age of the account. So my plan should work, yey
same confirmed here:
https://my529.org/what-is-the-secure-act-2-0/

A couple of notes on this idea:

1.  You can't roll the entire $35K at once - the $35K is a lifetime limit per person.  You can only do the rollover each year to whatever the annual Roth contribution limit is that year ($6K or whatever).  So it would take maybe 5 years of rollovers.

2.  You have to have eligible compensation for the Roth contribution in the year of the rollover.  So if you're doing a $6K 529->Roth rollover in 20xx, you also need to have W-2 or Schedule C income of at least $6K in 20xx.  So using this method after you've FIREd is problematic.

3.  To answer @Laura33's comment in the second post on this thread, any 529->Roth rollover amount counts against the annual contribution.  You cannot, for example, do a $6K 529->Roth rollover and a $6K Roth contribution in the same year (well you can, but doing so would create an excess contribution situation which is better avoided).

4.  Many 529 plans effectuate a "change in beneficiary" by requiring you to open a new 529 plan account for the new beneficiary and then making a transfer from the first beneficiary's 529 plan account to the new beneficiary's (newly created) 529 account.  So if you are going to do this, the "change beneficiary 5 minutes before" probably won't work; you probably want to open (and even better, fund, as noted above) the parental 529 15 years ago.

5.  There's also a 5 year provision - the only amounts eligible for rollover are contributions (and attributable earnings) from 5 years prior to the rollover.

For most cases that I can imagine, if a person is actually wanting to put money in their Roth, they probably can just do it directly rather than this convoluted wash-through-a-529 idea.  The money ends up in the Roth either way, is tax-free either way, and you can't exceed the annual Roth contribution limits by being convoluted.  The only benefit I see in the convoluted way is that the income limits for Roth contributions do not apply to 529->Roth rollovers.  But even in that scenario doing a boring backdoor Roth contribution is probably simpler and an already accepted way of getting around the income limitations.
« Last Edit: November 14, 2023, 10:42:15 AM by secondcor521 »

Laura33

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #11 on: November 14, 2023, 01:13:59 PM »
3.  To answer @Laura33's comment in the second post on this thread, any 529->Roth rollover amount counts against the annual contribution.  You cannot, for example, do a $6K 529->Roth rollover and a $6K Roth contribution in the same year (well you can, but doing so would create an excess contribution situation which is better avoided).

. . . .

For most cases that I can imagine, if a person is actually wanting to put money in their Roth, they probably can just do it directly rather than this convoluted wash-through-a-529 idea.  The money ends up in the Roth either way, is tax-free either way, and you can't exceed the annual Roth contribution limits by being convoluted.  The only benefit I see in the convoluted way is that the income limits for Roth contributions do not apply to 529->Roth rollovers.  But even in that scenario doing a boring backdoor Roth contribution is probably simpler and an already accepted way of getting around the income limitations.

Thanks for this -- that's what I thought.

I do think it may be helpful for my DD -- she has just started full-time work post-college, and she hasn't even gotten to the point of maxing out her 401(k) yet.  So rolling over leftover 529 into her Roth could allow her to fill up additional tax-sheltered space that she otherwise would not be able to.  And of course we all know the value of tax-advantaged savings that start at age 22.  ;-)  (Hmmmm, maybe I will suggest this to my mom as a potential Christmas present, since she's the one with 529 $$ leftover . . . .)

I think there is a little additional benefit, though:  my state gives a tax credit on the first c. $2500/yr contributed to a 529; between us and the grandparents, that was $10K/yr per kid, which took $900/yr off our state/local tax bill (per kid).  With a Roth, you'd normally be making contributions with after-tax $$ (or paying tax on the gains from a tIRA).  With this new rollover option, it's pre-tax $$ on the statelocal level.  Not as huge as if it were pre-tax on the federal level, but it's not nothing. 


secondcor521

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #12 on: November 14, 2023, 02:21:18 PM »
3.  To answer @Laura33's comment in the second post on this thread, any 529->Roth rollover amount counts against the annual contribution.  You cannot, for example, do a $6K 529->Roth rollover and a $6K Roth contribution in the same year (well you can, but doing so would create an excess contribution situation which is better avoided).

. . . .

For most cases that I can imagine, if a person is actually wanting to put money in their Roth, they probably can just do it directly rather than this convoluted wash-through-a-529 idea.  The money ends up in the Roth either way, is tax-free either way, and you can't exceed the annual Roth contribution limits by being convoluted.  The only benefit I see in the convoluted way is that the income limits for Roth contributions do not apply to 529->Roth rollovers.  But even in that scenario doing a boring backdoor Roth contribution is probably simpler and an already accepted way of getting around the income limitations.

Thanks for this -- that's what I thought.

I do think it may be helpful for my DD -- she has just started full-time work post-college, and she hasn't even gotten to the point of maxing out her 401(k) yet.  So rolling over leftover 529 into her Roth could allow her to fill up additional tax-sheltered space that she otherwise would not be able to.  And of course we all know the value of tax-advantaged savings that start at age 22.  ;-)  (Hmmmm, maybe I will suggest this to my mom as a potential Christmas present, since she's the one with 529 $$ leftover . . . .)

I think there is a little additional benefit, though:  my state gives a tax credit on the first c. $2500/yr contributed to a 529; between us and the grandparents, that was $10K/yr per kid, which took $900/yr off our state/local tax bill (per kid).  With a Roth, you'd normally be making contributions with after-tax $$ (or paying tax on the gains from a tIRA).  With this new rollover option, it's pre-tax $$ on the statelocal level.  Not as huge as if it were pre-tax on the federal level, but it's not nothing.

Yup.  Using this 529->Roth rollover allows the new grad to do more in other areas - 401(k), house downpayment, car, wedding, whatever.

I'd suggest your Mom and DD work together and coordinate - it would be unfortunate to have your Mom do the 529->Roth rollover and DD do her own Roth conversion without understanding the overlap.

On your second paragraph about the state tax benefit - that's true.  Make sure there is no recapture taxes, although there shouldn't be because the 529->Roth rollover is treated as a qualified education expense at the federal level, so it's as if she spent it on books or tuition or whatever.  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).

Laura33

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #13 on: November 14, 2023, 03:19:28 PM »
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.

secondcor521

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #14 on: November 14, 2023, 03:38:41 PM »
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.

Laura33

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #15 on: November 15, 2023, 08:28:51 AM »
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.

Quote
(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?   

secondcor521

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #16 on: November 15, 2023, 10:09:30 AM »
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.

Quote
(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.

Laura33

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #17 on: November 15, 2023, 10:17:43 AM »
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.

Thanks -- that's what I was missing:  that the tuition payments are also on a FIFO basis, so if you're both contributing and withdrawing, you could be getting into the most recent 5 years' contributions.  My mom is closer to the latter scenario (DD is a '23 grad), so we'll have to take a closer look at account values and contribution dates.  Very much appreciate the guidance.

secondcor521

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Re: 529 - New Alternative to ROTH IRA for Kids?
« Reply #18 on: November 15, 2023, 10:53:45 AM »
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.

Thanks -- that's what I was missing:  that the tuition payments are also on a FIFO basis, so if you're both contributing and withdrawing, you could be getting into the most recent 5 years' contributions.  My mom is closer to the latter scenario (DD is a '23 grad), so we'll have to take a closer look at account values and contribution dates.  Very much appreciate the guidance.

Happy to help.  Good luck with your '23 grad!  My youngest is (scheduled and expected to be) a '24 grad.