The new 529-to-Roth IRA rollover (available beginning in 2024) has received much attention. How should we be thinking about it?

I blogged about the 529-to-Roth IRA rollover in depth on my blog:

Of course, it wouldn’t be tax planning without some twists and turns. On February 15th, the Texas Attorney General filed a 16 page lawsuit challenging the validity of the entire Omnibus bill. If successful, it would invalidate all of SECURE 2.0 (a part of the Omnibus bill) and the 529-to-Roth IRA rollover would vanish.

I did a separate video about this development here:

The 16 page lawsuit filed in federal court is here:

This video, the show notes, description, and any comments are for educational purposes only. They do not constitute tax, legal, financial, and/or investment advice for any person. Consult with your own advisors regarding your own matters….(read more)

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The 529 to Roth IRA rollover is a surprisingly rare but valuable strategy for saving for your child’s future education and retirement. It allows you to convert unused 529 college savings plan funds into a tax-free Roth IRA, which can grow tax-free indefinitely until your child is old enough to use the funds for retirement.

There are several reasons why you might want to consider a 529 to Roth IRA rollover. Firstly, if your child receives a scholarship, there may be unused funds in their 529 plan that you may want to divert towards their retirement. This is particularly beneficial if your child is unlikely to need all of the college savings plan funds and is already on track for financial stability in their career.

Additionally, by rolling over funds from a 529 college savings plan into a Roth IRA, you have the opportunity to increase the overall balance of your retirement account. Roth IRA accounts have no age limits for contributions and no required minimum distributions, meaning that they can grow tax-free for years to come. The earlier you start contributing to a Roth IRA, the more time it has to grow tax-free.

To execute a 529 to Roth IRA rollover, you will need to follow several steps. First, you must ensure that you have a Roth IRA account open with a brokerage firm or other financial institution. Then, you will need to withdraw funds from your 529 plan, making sure that you do not withdraw more than you are allowed to without incurring a penalty.

Next, you must rollover the funds into your Roth IRA account. It is important to note that the amount you roll over is subject to federal income tax unless you are over 59 ½ years old and have held the account for at least five years. You will also need to fill out IRS Form 8606 to report the amount of taxable income from your rollover.

Overall, the 529 to Roth IRA rollover is a useful financial strategy for parents who wish to maximize their child’s college savings plan while also investing in their future retirement. However, it is important to consult with a financial advisor before making any major financial decisions, as each family’s financial situation is unique.