On July 13, 2022

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.

Do you want to submit feedback to the editor?

Send Us An Email!

Related Posts

United Way of Rutland County names new exc. director

May 22, 2024
The United Way of Rutland County (UWRC) announced the appointment of Tina Van Guilder as its new executive director, May 17.  Van Guilder officially assumed her role as executive director May 6. With over seven years of direct non-profit leadership experience in the Rutland County area, coupled with recent roles focusing on grant coordination, budget…

Moving sticks and rocks

May 22, 2024
Then the tough choice of how to play today:ski, bike, paddle, fish, hike, run?  The bug went down my throat. Literally, flew down my throat and landed in the back at such speed that I had no choice but to just swallow. Mmmmm, gotta love that extra protein that Vermont provides during the early spring…

What are the chances?

May 22, 2024
Vesna Vulovic is a name etched in the annals of miraculous survival — perhaps the most unlikely survival story of all time. She was thrust into the spotlight on Jan. 26, 1972, when she unwittingly became a symbol of human resilience.  A native of Belgrade, Yugoslavia, Vesna’s journey to that fateful day began like that…

The Outside Story: Jesup’s milk-vetch: A rare beauty

May 22, 2024
A few ledges along the Connecticut River are home to a rare plant commonly known as Jesup’s milk-vetch (Astragalus robbinsii var. jesupii). In fact, this species, which has been listed as federally endangered since 1987, only grows at six sites along a 16-mile stretch of the river in New Hampshire and Vermont. But conservationists are working…