The omnibus spending bill which is expected to pass in the next few days (see https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF at page 2161) has provisions allowing up to $35000 of leftover 529 money to be transferred to the beneficiary’s Roth IRA (if the distribution is made after December 31, 2023 - it is unclear if this allows an early 2024 contribution to a Roth for tax year 2023). This is great news if your kid wins a scholarship to help pay for college, though there are some limitations:
You can only use an amount up to the normal Roth limits each year ($6000 in 2022 and $6500 in 2023)
You have to have held the 529 in the name of that beneficiary for 15 years and the money had to be put in more than 5 years ago
However, these limitations don’t appear to stop you from redistributing scholarship money between your kids to fund their Roth IRAs if you set the 529 accounts up when they were born. Say for example, one kid wins a scholarship and has $105K left over, whereas your other two kids spend the $105K in their accounts on college. Then you can move $35K into the other two accounts and use it to fund a Roth IRA for all three kids over the five or six years after they graduate (to reach the cumulative $35K lifetime limit). You can even use it to make Roth contributions on your kids’ summer earnings while they are in college, assuming the money was contributed 5 years previously and the account was set up in early childhood.
Sounds like very good news for those to whom it would benefit. I will say, though, that the feds’ need to work on improved clarity of language. I’ll wait until everything is condensed into the corrected forms of sections 408(A) (i.e. Roth) and 529 for easier legibility.
It should benefit your daughter, as long as she is a beneficiary of a 529 account that has been open at least 15 years before a tax and penalty-free rollover to a Roth IRA, and the 529 distribution is done after December 31, 2023.
So is the 35k limit a lifetime limit per recipient of the rollover? Or could a grandparent’s 529 account also be used to rollover another 35k into the grandchild’s Roth IRA.
I’m not sure how everyone else sees this, but to me this reads like an amazing wealth building tool for the beneficiary. I would suspect a lot of teens / young adults could manage to get the entire 35k into a Roth by the time they’re 20.
Using a little modeling with projectionlab, assuming the 35k doesn’t increase with inflation, it would take on average 6k deposited at birth to grow to 35k by age 20 (if invested in 100% stocks, again on average). If this money were converted to Roth by age 20, and not touched, it would be worth about $360k-500k (adjusted to inflation) by age 65 (This was a quick analysis, I could be wrong, and of course there is a lot of variability)
Yes it’s a limit per recipient, not per account. We have to see the exact rules for implementation, for example whether there will be restrictions on rollovers, but it should be very beneficial for leftover 529 money.
However, you can only get the money out to the extent of the recipients’ earnings that would make them eligible to make Roth contributions (and subject to the same $6000/$6500 per year limit). So even with some summer jobs that’s usually going to take several years after graduating from college.
There does appear to be a provision exempting these rollovers from the normal Roth maximum income limitations which is great. Arguably for a kid with rapidly increasing earnings that will go above the maximum cutoff, you might therefore want to wait a few years before starting to roll it over.