S3 Ep6: GRD034: How Big of a Deal Is the 529 To Roth Rollover?

In this episode of The Great Retirement Debate, Ed Slott and Jeff Levine debate whether or not the 529 to Roth IRA rollover is worthwhile. 

Episode Transcript

(00:00):
Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just loveto talk about retirement and taxes.
Look, our mission is simple to educateyou, the saver, so that you can make
better decisions because better decisionson the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debatethe pros and the cons of a particular
retirement strategy or topic.

(00:22):
With the goal of helping you keepmore of your hard earned money.
At the end of each debate, there'sgoing to be one clear winner.
You.
A more informed saver who canhopefully apply the merits of
each side of the debate to yourown personal situation to decide
what's best for you and your family.
So here we go.
Welcome to the Great Retirement Debate.

(00:43):
Yeah, do you ever, uh, finish a mealand, uh, still have some leftovers?
Lately, yes.
But when I was younger, youhad to finish everything.
The Clean Plate Club.
That's right.
Jack Armstrong's Clean Plate Club.
Right.
Especially at my grandmother's house.
You don't leave anything, or what?
You didn't like it?
Well, you know, that was probably nota good idea to have some leftovers.

(01:03):
But sometimes leftovers aren'tthe worst thing in the world.
For instance, a lot of people save forcollege for their children 529 plans.
Well, maybe those kids end up witha scholarship or maybe there's
just leftover money becausethe investments have been good.
There may be some leftovers inthe 529 plan account, and there's
a new opportunity beginning thisyear in 2024 of what we might think

(01:28):
about doing with those leftovers.
Yes.
Now you can roll some of them.
over to a Roth IRA.
A great provision.
One of the best provisionsof the good ones in Secure 2.
0.
There's a lot of goodones actually in Secure 2.
0.
And people are liking it so much thatthey don't understand it because even

(01:49):
the financial advisors when this firstcame out, I remember advising, Oh good.
I have a client.
They have like 200, 000.
We can just put that in a Roth.
Whoa, hold on a minute.
All right.
So that's really the topicthen of today's video.
Great retirement debate, Ed, ishow big of a deal is this new
provision of the ability to movemoney from a 529 plan to a Roth IRA?

(02:11):
I wouldn't call it a big deal, abig change, but it's a mediocre
deal depending on how much you have.
You gave an example.
Well, you have two, or maybe I said it.
You gave an example.
Words in my mouth.
You were talking about food,but I was talking about money.
I'm always talking about food.
Alright, let me getback to the money part.

(02:33):
Let's say you have a few hundredthousand because of all the
reasons you said, you didn't spendit, the kid got a scholarship.
And remember, many of these accountswere started by people that all believed
their kid was an ex Einstein, right?
You know, oh, I gotta tell you, he'sdefinitely going to college, he's
gonna do this, he's gonna do that.
And you don't know, you know, whenthe kid is 17, 18, college age, if

(02:55):
that's, if college is even right.
Sure.
It's more of, uh, an issue actuallytoday with the cost of college.
Yes.
College has become very you have to plan.
I mean, you don't have to,but it's best if you plan.
You obviously have more money,the more years you plan for it.
So now, they have to.
So what you're saying is you might startsaving for a child's education when
they're born or in some cases even before.

(03:16):
And With no real idea of whetherthey're going to actually
need those dollars or not.
But the idea is good because that's abig item even today, the cost of college.
But let's say, uh, once you knowthe answer and you're past that
point and you say, you know what?
I've got too much money in this account.

(03:36):
Uh, now with this new provision,you could roll some of that over
to a Roth IRA, but not all of it,or in most cases, not all of it.
Alright, so let's talk about justwhat the rules are, and then we'll get
into whether it's a big deal or not.
So by, by background, historically,money in a 529 plan, there, there
was no, you know, Mechanism ofwhat to do with the leftovers.

(03:57):
Many times, It was either just, Do youwant to take the money out, pay income tax
and a ten percent penalty on the earnings.
Or do you want to maybe move itinto another beneficiaries account?
And that's one of the uniquethings about 529 plans.
You could change that unlike anyother tax preference account.
Unlike an hsa, unlike an ira,unlike a 401k, you could basically

(04:18):
change who the money belongs to.
You could shift it aroundeligible family members.
And it's a large, it's alarge degree, You're like It's
a pretty good flexibility.
It's not just immediate family of, youknow, husband, wife, son, daughter,
parent, but it actually extends outeven as far as first cousins, uh, in
terms of eligible family members thatyou can transfer these assets to.
And you said husband and wife.

(04:39):
Most people don't know that,that they could use it themselves
when they go back to school.
Absolutely.
In fact, Uh, you know, not relevantnecessarily for today's discussion
but starting to see even more seniorsput money into a 529 plan thinking
like, hey, when I graduate, I eitherwant to go back to school or I
want to do some sort of vocationalwork, uh, and learn a new skill.
And as long as a program is registeredwith the Department of Labor

(05:00):
appropriately, you can actually usethe money in the 529 plan for that.
But all that being said, right, thosehave historically been your two choices.
Either move it to somebody elsewho might want to use it or take
it out, but pay a tax and a penaltyon any earnings that you had that
weren't used for educational dollars.
Well, as part of Secure Act 2.
0, this was the law passed in lateDecember, December 29th of 2022.

(05:22):
The, uh, the law basically said,That a limited amount of dollars will
get into this in a second could bemoved from an individual's 529 plan
where they are the beneficiary to aRoth IRA where they are the owner.
So, just again, to clarify here,the like to like on the transfer
here is the beneficiary of the529 plan has to be like, or the

(05:45):
same as the owner of the Roth IRA.
Right.
So, all the advisors like the idea, anda lot of people did because they had, the
people had big balances that they didn'tthink they were going to use in the 529.
So right away, tons of misinformation,I don't know if you saw that
too, even from the advisors.
Yes.
Can I roll over 300, 000,but you know, whatever.
No, no, no.

(06:06):
This is for people thatmaybe we're over by a little.
There's a lifetime cap, and that'sthe key here, of only 35, 000.
So we're not talking about, you know, astaggering amount, but it is a change.
It's a major change, but it'snot available, it's available to
everybody, but it's not going tosolve the big problem for, you
know, giant, uh, accumulations.

(06:28):
So that's a 35, 000 lifetime.
Per beneficiary.
Yeah, lifetime.
Yep, lifetime.
Per beneficiary.
Yeah.
Right.
On annual.
Right.
No, no, that's not 35.
No, I'm saying there's a separate.
Oh, right, right, right.
But here's the thing.
There are a bunch of conditions.
First of all, the accounthad to be open for 15 years.

(06:49):
That's the 529 plan account, right?
Yeah.
And the first five years don't count.
So, uh, you can't move those dollars.
And, uh, so I like to thinkof it as you got to let,
there's two marinating periods.
You can let the account marinatefor 15 years before it's ready.
And you got to let the dollars insidethe account marinate for at least five.

(07:09):
So a lot of times maybe, you know, maybeyour child is just coming up on the end
of their college education and you stillhave a 529 plan open and you're like,
well, I've had this open for 15 years,but it's only got a hundred dollars left.
I'll just put in money todayand do, no, you can't do that.
Right, right.
The money you put in today.
The five years.
Has to meet the five years.
Yup.
Right.
And assuming you meet those hurdles,then, as Jeff just said, remember,

(07:32):
it's going to that same child, abeneficiary's Roth IRA, and it comes in.
Sort of under the contribution toRoth IRA rules, which means you
have to, to put money into a Roth.
Anybody to contribute, not notconvert a rollover, although
this is called a rollover.
Uh, to contribute youhave to have compensation.

(07:53):
Uh, W2 or 10 99.
Self-employment income, whatever.
Generally Earnings.
Yeah.
Earnings.
Mm-Hmm.
compensation, earnings.
And the child may not haveearnings that would throw them out.
Mm-Hmm.
. So.
If they have, let's say they have theearnings, but they already did their
own Roth, that would throw them out.
Or if they maxed out, so thisyear for under 50 is 7, 000.

(08:17):
So let's say the child was excited, gothis first job, and he immediately got
good advice and put 7, 000 in a Roth.
Well, he doesn't qualify.
He already filled the Roth bucket.
So, there are a lot of rules around this.
There's one thing, I think you'reprobably hearing the same thing.
The, the most common askedquestion, uh, is what?
What happens if I change the benefitshare Right, and there's no answer

(08:39):
for that, that I know of right now.
Now, by the time you see this, We mayhave an answer, because we're waiting
at this point, we're doing this program.
But that is the most common question,because people say, Well, if I can't
do it, can I change beneficiariesfor the start of the 15 year clock?
All right, Ed.
We're here.
We're recording this.
Yeah.
For posterity.
I don't think it matters.

(09:02):
I don't think that'sthe spirit of the law.
The 15 years is the 15 years.
You don't have to restart the 15 years.
That's my opinion.
It hasn't been rolled out yet.
I actually agree with you,so I guess we're not going
to have a debate about that.
But I think it's for a different reason.
I, so maybe we willhave a debate about it.
I, I actually think it will be the 15years, but the reason I think they're not
going to go back and restart the clock is,if you think about why Congress created

(09:25):
this provision, it actually wasn't meantto like help all the little rich boys and
girls who have this extra money, right?
It was meant, we don't want to stopmom and dad from saving for their
child's education because they'reworried that they might need the
money for their own retirement.
And so, if, uh, you know, nowcertainly mom and dad could, like, for

(09:49):
instance, I, I'll use me as an example.
Yeah.
I have three kids.
I could have a 529 plan.
I could make me the ownerand me the beneficiary.
Right.
And then when my kids reachcollege age, I could decide, do
I want to use the money for them?
And if I do, I could changethe beneficiary of the
plan, like we talked about.
Right.
To my kids.
That's one way of doing it.
I didn't do that.

(10:09):
I have three kids.
I have three different 529plans, one for each of my kids.
And that's what 90, I don't knowthis is a statistic, but almost all
individuals, they put the 529 planas the beneficiary of the person who
they really intend to use the money.
But let's say I neededthe dollars back, right?
You wanted to, right?
Well, right.

(10:29):
I decided I don't want to Pay for thekids' education or again, they get a
scholarship, they don't need the money.
And I say, well, I put thisfor education, not for them.
Right, right.
Not for their retirement.
Right.
If I had to wait 15 years after movingit back to me, what good does that do?
Yeah, that, that, that makes a good point.
So I think that Congress, I thinkthat the, I rather the IRS and
their regulations will take thatinto consideration, although I

(10:52):
could see them putting in somesort of anti-abuse rule where once
you change the beneficiary once.
They, uh, so you getone bite at the apple.
Exactly.
Something like that.
Yeah.
There's another rule.
I didn't go through a littletechnical, but I talked about the
ability to contribute to a Roth.
You have to have the earnings.
We said Mm-Hmm.
. But one of the things that,uh, may throw you out.

(11:13):
for contributing to a Roth, notconversion, but there are income limits
on who can make a Roth IRA contribution.
Now, this is a regular Rothcontribution, regular Roth contribution.
There are high limits and mostof the children we're talking
about probably are not over that.
But what's unique in this provision,even if they are over that income

(11:33):
limit, they can still do this.
Yeah, it's really, it's, uh, itwas, you have to have earnings,
but you can't have too much.
Right.
It was weird.
Right.
But you can't have toomuch for a regular Roth.
Right.
Yeah.
Very strange.
Very, very strange choice on the part ofCongress, I thought, but nevertheless.
All right.
So, so those are the rules.
Just to recap, right?
If you want to use this,you can take money.
It can go from one individual's 529plan where they have the beneficiary,

(11:58):
To a Roth IRA where they're the owner.
In order to make that move, theperson has to have compensation,
which is generally earnings.
They can only do it if theaccount, the 529 plan account,
has been open 15 years or more.
If there have been dollars in theaccount for at least 5 years, the
maximum they can move in any oneyear Is the Roth IRA contribution for

(12:19):
that year less any IRA contributionsthey've already made separately and
over the course of their lifetimethe most that they can do is 35, 000.
I think that covers it, right?
Right.
Uh, I want to hit on one point therebecause some people thought originally,
again, it came out, there's a lot ofmisinformation, they thought originally
you could use the 35, 000 at once.
Now, we have an easy example thisyear because the IRA contribution

(12:43):
limit for happens to be 7,000 easily divisible into 35.
Right.
Yes.
So you could do 7, 000 ayear, uh, for the five years.
That's how you use up the35, 000, but interesting.
You get that for each beneficiary.
So you can expand that 35, 000,but in chunks of 7, 000 a year.

(13:06):
Maximum.
Yeah.
Well I shouldn't say that.
7,000 a year for this year.
Correct.
It's going to go up withthe inflation increases.
Alright, so we've covered the rules.
Now let's answer the real question oftoday's discussion of today's debate,
which is, how big of a deal is this?
I don't think it's that big adeal except for the right people

(13:26):
that just want to clean out.
Maybe they're just over it.
They have a few dollars over.
They don't think they're going to use it.
What a great deal.
And you made a good point.
Maybe I'll put in my own, uh,Roth IRA and just clean house.
So for those people, it's a pretty,it's a nice convenience, you might say.
But for people that, uh, have, you know,a way overloaded, uh, in accumulations to

(13:47):
300, 000, uh, they'll get a little out.
They're a little.
You know, they'll chop it down.
They'll trim down the balances a little.
But if you have enough beneficiaries,look, you have 10 kids.
You could chop it down.
You could trim it down quite a bit.
But most people with, you know,a few beneficiaries, 10 kids, you
know, would trim down the kids.
Yeah, right, right.
Too many kids.
Yeah, yeah.

(14:07):
So I don't know.
I would say it's an interesting provisionand it does help certain people, but not,
uh, Earth shattering or a game changing.
All right.
So, so I have a little bit ofa different flavor on this.
I, I, you know, I know we recorded, uh,an episode and people can go back and
listen to it after the Secure Act 2.
0 was first passed.
And we did kind of a wrap upof some of the special episode.

(14:30):
I think it was two parts ifI'm not mistaken, because
there's so many darn provisions.
Only 90.
2.
0.
Yeah.
Um, and we talked about this and I, I, Imight have been, You know, bearish on this
at the time in terms of the real value.
I've, I've started to come around alittle bit and I think it's a little
bit bigger deal in the right set ofcircumstances than we give it credit for.
For instance, you know,when most children are born.

(14:52):
They don't have compensation, right?
They don't, uh, uh, a one yearold, a zero year old, they
don't have earnings, typically.
Right.
Unless they're a child actoror a model or something.
Oh, I see where you're going.
I see where you're going on this.
And you can't put moneyaside for their retirement.
But you could put money into a 529 plan.
And I've run numbers, right?
If you put in, let's say, 11, 000 whenthe kid is born, and the account earns,

(15:13):
let's say, 7 percent a year, by the timethe kid is, let's say, 16 and they get a
summer job, now they have compensation.
Now we can begin to leak some of thatmoney from their 529 plan over as
these Roth IRA contributions for them.
If, if you follow this through,assuming they make enough, assuming
they make enough, that's what I'mgiving the example of a summer job.

(15:33):
I guess it's a nice summer job, right?
Really good summer job.
You know, some of them work hard,you know, got to earn a living.
And let's say that that 529 plangoes over to the Roth, it'd probably
take about four or five years,depending upon what the future IRA
contribution limits are at that time.
Right.
The, by the time the kid was 65 yearsold, that 11, 000, you want to take

(15:54):
a guess of what that would turn into?
Uh.
Depending on the interest rate, I don'tknow, you're going to tell me 500, 000?
No, at 7%, it's a million dollars.
Wow.
By the time the kid would be 85, uh, orexcuse me, 80 years old, that Wait, wait,
without making any more contributions?
Without any more contributions.
7%?
7%.
For putting in only four or five years?

(16:15):
For putting in at starting with 11, 000when the kid is born into the 529 plan.
Into the 529.
That's right.
So you're getting those first years.
We're not talking about the Roth.
And then ultimately transferring the 11,000 plus the growth over into the Roth.
So you're getting 35, 000 still in.
Because over the first 15 years, it grows.
Right.
So, so basically whatI did was I backed out.
I said, okay, in order to get to 35.

(16:37):
That, so.
The 8, uh, the 529 balance plus the Roth?
It's just the 11, 000.
So 11, 000 over the course oflet's say 16 to 20 years, right?
It becomes 35 in the 529 plan.
Right.
That gets moved over at 7 or 8 thousanddollar a year increments, right?
Into the Roth IRA.
Right.

(16:57):
But for a limited time.
Just, right.
So we get the 35, 000 into the Roth IRA.
Right.
That 35, 000 becomes 1 millionby the time the kid's 65.
Right.
And what age?
And when they're 80, it'stwo and a half million.
So what do we start?
Like around 20 or something?
Age 20?
Uh, 16, moving the money over, yeah.
Oh, 16.
Okay, so yeah.
Well, that's a lot.
But that's, that is an incrediblehead start for a kid in life.

(17:20):
I mean, it's much more.
I mean, you, Ed, you, you, you know,you understand the power of compounding
better than most, most anyone out there.
And you even, you know, on top of yourhead, you're like, I don't know, 500, 000?
Twice that!
I know, I know.
Right?
Twice that.
Well, I didn't see here the, uh, rate.
I.
I.
I.
I.
I.
Yeah.
But, but I'm saying it, it's a lot more,I I didn't believe it when I first ran.
Am am I doing this math right.
I still, yeah.
. So I mean that's one way.
The other thing I think thatthis can be, you know, I think

(17:41):
that's the big deal, right?
Is if you wanted to, and, and itdoesn't mean you don't save for the
kids' education in the 5 29 pointand then also assumes the kids when
they have the Roth ira, don't use it.
Don't, don't empty it.
You know?
Oh, that's a nice house.
Yeah, well that's a, that's a whole,that's a different podcast, . But the
other thing I thought where this couldbe really interesting is, you know, ed,
a lot of people who are high earners.

(18:02):
They use this backdoor Roth IRA, right?
With the regular backdoor Roth, 100percent of the money that you get into
the Roth IRA has been taxed, right?
If you did this proactively, andadmittedly it probably takes a lot of
proactivity because you're generallygoing to be looking 15 years in the
future, but you could use this as abetter backdoor Roth in some cases,

(18:24):
because you put in the same, if youtake the same set of facts, right?
Put in 11, 000, wait 15 years,let it be worth 35, right?
Now, you can use that as the sourceof your backdoor Roth and you've only
ever paid tax on that initial 11, 000.
Yeah.
So, so I, you know, I, I think thefirst part of that was the bigger
issue or the, the bigger deal, right?
Again, getting a kid a headstart inlife of, I look, I know in 65 years

(18:47):
at a million dollars then won't bea million dollars what it is today.
And I know in 80 years, two anda half million won't be what
it is still a heck of reality.
Back to my other point.
It's going to be hard when you're notthere anymore, even if you're in your
nineties, to tell kids in their thirties,forties, oh, you can't touch that.
M.
C.
Hammer did it very effectively.

(19:08):
You know, we just got to get him going.
Yeah.
All right.
Well, good discussion today, Ed.
Ultimately, I think there's somereally good points to be made on both
sides about how big of a deal this is.
Ultimately, it's limited bythat 35, 000 lifetime cap.
But, if you start early and use that35, 000 cap to its fullest extent,
it can still create significantlypositive incomes for individuals.

(19:29):
In the right circumstances, yes.
Alright, well, the right circumstanceis for you to come back for our
next Great Retirement Debate.
Ed, as always, this was fun.
Alright, thanks.
See you next time on theGreat Retirement Debate.
Jeffrey Levine is Chief PlanningOfficer for Buckingham Wealth Partners.
This podcast is for informational andeducational purposes only and should
not be construed as specific investment,accounting, legal, or tax advice.

(19:51):
Certain information mentioned maybe based on third party information
which may become outdated orotherwise superseded without notice.
Third party information is deemedto be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed in correspondingarguments are those of the speakers
and may not accurately reflectthose of Buckingham Wealth Partners.