College Savings Recovery Act

By Kevin Theissen

In early June, the College Savings Recovery Act was introduced in the Senate. The bill would potentially allow 529 Education Savings Plan account holders to rollover assets to a Roth IRA.

It’s not yet certain whether the bill will get through Congress, but it seems to have some momentum. To qualify for a Roth IRA rollover, the 529 plan owner must have maintained the account for at least 10 years. The beneficiary of the account can be changed during that time without triggering a new 10-year period. The funds in the 529 plan could be rolled into the Roth IRA of either the owner of the 529 plan or the beneficiary of the 529 plan. The amount that can be rolled over, annually, would be limited to the lesser of the amount of 529 plan contributions that have been in the account for at least five years, along with the earnings on such contributions – or the annual Roth IRA limit, reduced by any contributions to IRAs (Traditional and Roth) made before the date of the 529 plan distribution — meaning rolled into a Roth IRA.

So, this is an encouraging step but not earth-shattering. The maximum amount that would be able to be rolled over from a 529 plan to a Roth IRA would be limited to no more than the annual contribution limit — currently $6,000. For those 529 plan owners who have significant savings that are no longer needed for education expenses held within the plan, shifting dollars from the 529 plan to a Roth IRA will potentially be a very slow process.

The current language of the legislation seems to have a timing strategy that could be used to “stuff” Roth IRAs with additional contributions. For example, the amount that could be rolled from the 529 plan to the Roth IRA each year would be limited to the annual contribution limit, reduced by contributions made earlier in the year to IRA and/or Roth IRA of the receiving individual. This might create a loophole to allow shifting money from a 529 plan to a Roth IRA and make additional contributions to a Traditional IRA or Roth IRA during the same year. So higher income individuals could fund 529 plans (which have no income limits for contributions) with dollars never really intended for education. Then, after the required holding time, those dollars could be shifted over to Roth IRAs, in addition to annual regular IRA/Roth contributions.

Many are hesitant to contribute to 529 plans instead of for retirement. The proposed 529-plan-to-Roth IRA rollover might help to alleviate that concern.

Kevin Theissen is the owner and principal of HWC Financial in Ludlow.