By Ian Berger, JD
IRA Analyst
Follow Us on X: @theslottreport
When the bell dropped in Times Square last Sunday night, a bunch of new provisions from the SECURE 2.0 legislation kicked in. This article will focus on the Roth-related changes that are effective in 2024.
529-to-Roth IRA Rollovers
Under the tax rules, if funds in a section 529 plan are not used for education, the earnings are taxable and subject to a 10% penalty. This has scared many people away from funding 529 plans. As a way of relieving these fears, Congress included a provision in SECURE 2.0 that allows for rollovers of unused 529 funds to Roth IRAs. While this a worthy idea, beware of important restrictions on this new rollover rule.
- The maximum amount that can be rolled over from a 529 account to a Roth IRA is $35,000. There is currently no indexing of this limit for inflation. The $35,000 limit is a lifetime maximum, and it appears to apply per beneficiary.
- The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if the owner is different from the beneficiary).
- The 529 plan must have been open for more than 15 years. The IRS still hasn’t said whether a new 15-year waiting period is required when a 529 is transferred to a new beneficiary.
- Rollover amounts cannot include any 529 contributions (and earnings on those contributions) made in the preceding five-year period.
- Rollovers are subject to the annual Roth IRA contribution limit. So, for example, no more than $7,000 can be rolled over from a 529 to a Roth IRA in 2024. The effect of this rule is that it would take several years to do a full $35,000 529-to-Roth IRA rollover.
- Any 529-to-Roth rollover would count towards the IRA contribution limit in effect for that year. For example, a beneficiary doing a $5,000 rollover from a 529 plan in 2024 can only make an additional $2,000 IRA (or Roth IRA) contribution for 2024. Further, a 529 beneficiary doing the rollover must have compensation in the year of the rollover at least equal to the amount being rolled over.
No RMDs on Roth 401(k) Funds
Before 2024, one big advantage that Roth IRAs had over Roth funds in 401(k) (and other company plans) was that Roth IRA owners never have to take RMDs, but Roth 401(k) account holders did. SECURE 2.0 does away with this distinction by exempting Roth 401(k) funds from lifetime RMDs.
Keep in mind that beneficiaries of inherited Roth 401(k)s are still subject to RMDs. Also, even with this change, rolling over Roth 401(k) funds to a Roth IRA might still make sense because of more favorable Roth IRA distribution rules and a wider variety of investment options.
Mandatory Roth 401(k) Catch-Ups – DELAYED
January 1, 2024 was originally supposed to be the effective date of the SECURE 2.0 rule requiring that age-50-or-older catch-up contributions by highly-paid employees to 401(k) (and other plans) be made on a Roth basis. But, in the face of persistent complaints by recordkeepers and lobbying groups, the IRS delayed the effective date of this rule until 2026.
https://www.irahelp.com/slottreport/new-roth-provisions-effective-2024