Jason P. Tank: Roth IRAs are lessons in complexity

Jul. 2—Q: I've heard a recent law, known as Secure 2.0, created some interesting possibilities for leftover money held in 529 plans for college savings. Namely, the new law seems to allow you to rollover the unused 529 plan balance into a Roth IRA. How does this work?

A: Among the many changes that Secure 2.0 created to enhance retirement savings, Congress did establish some new rules for college savings plans, commonly known as 529 plans.

Starting in 2024, leftover 529 plan balances can now be rolled over into a Roth IRA for the plan's named beneficiary. However, the new law lays out a number of rules that diminish the planning opportunity.

To start, in order to be allowed to do a 529 plan-to-Roth IRA rollover, you'll need to have started the college savings plan at least 15 years prior. Naturally, to get this countdown started, you should open a 529 plan for your kids or grandkids as soon as possible.

Next, you are limited in the amount that can even be rolled over into a Roth IRA. The overall limit for a 529 plan-to-Roth IRA rollover is $35,000.

Further, you aren't allowed to do this amount as a one-time rollover. Instead, the annual rollover limit is set at the normal IRA contribution maximum. Today, that annual IRA contribution limit is $6,500. To reach the $35,000 lifetime limit, it will obviously take multiple years of planning. And, finally, the only dollars that are eligible for a 529 plan-to-Roth rollover are those that have been invested in the 529 plan for at least five years.

Q: With our federal debt continuing to grow, it seems that tax rates are going to increase in the years ahead. It's got me seriously thinking about doing some substantial Roth conversions. What factors should I consider before pulling the trigger?

A: I must admit, it's difficult to argue that tax rates are going to decline in the future! Given this, Roth conversions should certainly be top-of-mind.

But, a comprehensive Roth conversion analysis isn't as straight-forward as simply guessing about future tax law changes. There are multiple considerations and peculiarities that can substantially raise the cost of Roth conversions.

For example, you should be aware of the possible tax effect that Roth conversions can have on the taxation of your Social Security benefits.

In addition, in the case of large Roth conversions, you'll also need to watch out for a lesser-known wrinkle lurking in the tax code called the Net Investment Income Tax. And, of course, another important consideration is pushing your income so high that it results in you having to pay higher premiums for your Medicare Part B benefits.

Jason P. Tank, CFA, CFP is the owner of Front Street Wealth Management, a purely fee-only advisory firm, and the founder of the Money Series, a nonprofit program committed to providing open-access to financial education for all. Contact him at (231) 947-3775, [email protected] and www.FrontStreet.com.

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