529 Rollover Rules- Still Waiting for an Answer

Quick-Take: After 3+ years of the SECURE 2.0 Act, we are still waiting for guidance from the IRS on when the 15-year 529 ‘existence’ requirement applies to a new 529 beneficiary.

Background: Last week I received a simple inquiry from an advisor. A father had created and funded a 529 higher education savings account for one child more than 18 years ago. That child has since graduated from college and is doing well financially. Funds remain in that 529 account. The father wants to change the beneficiary on the 529 account from the original beneficiary, his oldest child, to a younger child with the intent that the younger child will rollover the 529 account balance to a Roth IRA. I looked at some of the Regulations that have been published by the IRS since the SECURE 2.0 Act was enacted to make sure I knew the answer to give. What I discovered was that after 3 years since the Act became law, there still is no answer to the father’s question. Is there another 15-year holding period that will be required

529 Rollover Rules: As a quick refresher, the Act permits excess 529 funds to be rolled over to a Roth IRA, but there are several conditions that must be met before that rollover is permitted.

• The 529 account must have been open for at least 15 years to be able to rollover its excess funds to the Roth IRA.
• The maximum amount of 529 funds that can be rolled over to a Roth IRA is $35,000.
• Only the beneficiary of the 529 account, not its owner, can engage in the rollover transaction to the Roth IRA.
• A rollover of 529 funds to the Roth IRA is limited to the maximum amount that could be contributed to the Roth IRA, and only if the beneficiary has earnings. This year the maximum contribution amount to a Roth IRA is $7,500. What this limitation means is that a rollover of the unused 529 account balance to a Roth IRA could take more than 2 years to accomplish, i.e., the maximum rollover amount per year is $7,500.
• If the beneficiary makes his/her own contributions to his/her Roth IRA, that reduces the amount of the 529 rollover.  For example, if the beneficiary contributes $3,000 to his/her Roth IRA from their own earnings, then the maximum amount that can be rolled over from the unused 529 account is $4,500.

Conclusion: So back to the father’s question. Currently the father is the owner of the 529 account for his oldest child. The 529 account has been open for more than 15 years. The oldest child for some reason does not need, nor per the father will he ever need, either the 529 account or a Roth IRA that held the unused 529. (A physician?) The oldest child could take advantage of this rollover opportunity, as he is the beneficiary of the 529 account. However, the father has the right, under the 529 account rules, to change the 529 beneficiary, usually to a close family member, like a sibling of the original 529 beneficiary. If the father exercised that right as the 529 account owner to change the beneficiary of the 529 account from his oldest child to a younger child, would that beneficiary change start a new 15-year holding requirement before the younger child could initiate the 529-to-Roth rollover? After 3 years we are still waiting for the answer.

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