By Andy Ives, CFP®, AIF®
IRA Analyst
When the “check engine” light comes on in a vehicle, most people are rightfully concerned that something is wrong. When a fire alarm blares through a building, it is wise to take stock of your surroundings. And when a member of Ed Slott’s Elite IRA Advisor Group℠ calls and says a red alert popped up on his monitor as he attempted to do a 529-to-Roth rollover, we must assess the situation. In the end, it is our opinion that the warning notification on the advisor’s computer was incorrect. A false alarm. What was the computer worried about?
Yes, there are a number of restrictions when it comes to moving money from a 529 plan to a Roth IRA. For example:
- The Roth IRA must be in the name of the 529 beneficiary.
- The maximum amount that can be rolled over in a lifetime is $35,000.
- The 529 plan must have been open for more than 15 years.
- Rollovers are subject to the annual Roth IRA contribution limit.
- Etc., etc.
In this case, it appeared that all the proper boxes were checked, and the coast was clear for the advisor to proceed. He completed a successful 529-to-Roth transaction in December 2024, and was now trying to execute another 529-to-Roth rollover for the same client in January 2025. Yet the computer was flashing a red alert. The message said that, when processing a 529-to-Roth rollover, the one-rollover-per-year rule must be considered. It is our interpretation that this is UNTRUE (although definitive guidance is needed). The SECURE Act explicitly states that, to qualify as a 529-to-Roth rollover, the transaction must be “paid in a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of such designated beneficiary.”
So, if the transaction must be completed as a direct trustee-to-trustee transfer, then the rollover rules are irrelevant. You cannot do a 529-to-Roth transaction as a 60-day rollover. As such, the one-rollover-per-year rule does not apply to 529-to-Roth IRA transfers. In hindsight, it’s easy to see where the confusion comes from. It’s all about terminology, and when a transaction is broadly referred to as a 529-to-Roth “rollover,” it is no surprise red flags go up.
Further proof (in our opinion) that the rollover rules do not apply to these transactions is that 529-to-Roth IRA transfers are considered Roth IRA contributions. The normal contribution limits apply. Any amount transferred from a 529 plan to a Roth IRA reduces the amount of a “regular” Roth IRA contribution the 529 beneficiary can make for that same year. Therefore, since these dollars are contributions, the rollover rules appear to be again rendered moot.
Alarms exist to keep people safe, and they should be heeded. However, sometimes a check engine light goes on for no ascertainable reason. Sometimes a jerk pulls a fire alarm as a bad joke, and sometimes computer software is incorrect. In this case, the advisor played his cards well. Assess the situation, contact the Ed Slott team, and proceed with confidence.
https://irahelp.com/slottreport/529-to-roth-ira-false-alarm/