Three TikTok Videos About 529 Plan to Roth IRA Rollovers That Are High on Drama and Low on Fact-checking
By J.R. Robinson, Founder/Financial Planner (December 2024)
My September 12, 2024, FPH Blog post, “We Fix Bad TikTok Advice,” discussed the proliferation of investment and financial planning advice from self-taught, armchair financial advisors and pointed out that there is now so much flawed advice being generated from TikTok and YouTube finfluencers that when someone searches for advice on a topic the crowd-sourced responses from AI-driven search often produce inaccurate results. In that article, I cited examples of videos that offer misguided backdoor Roth conversion guidance. In this follow-up post, I highlight three videos that are offering flawed advice on 529 Plan-to-Roth IRA rollover transfers.
For a bit of background information, the SECURE Act 2.0 is a broad-ranging piece of tax legislation that was enacted in 2022. Among its scores of provisions was a new rule that gives 529 College Savings Plan beneficiaries who may have extra accumulated funds in a 401(k) the ability to transfer up to a lifetime maximum of $35,000 to a Roth IRA beginning in the 2024 tax year. The finfluencer community appears to have seized on this relatively obscure provision and has been using it to flex their knowledge to their fans/followers.
As is often the case in tax laws, the devil is in the details. In this case, there are two problems. First, there are a number of expressly stated SECURE Act 2.0 restrictions and limitations on the rollovers that the finfluencers have either glossed over or misinterpreted. Second, the legislation itself lacks a number of critical details that make it risky for consumers to process the rollovers until the IRS provides specific clarification.
3 Finfluencer Videos Giving Questionable 529 Plan Rollover Advice
TikTok Handle: Lawmother
Untitled
In this video, the finfluencer, “Lawmother,” suggests that $35,000 can be transferred to a Roth IRA at one time. That is the maximum amount, but it can only be rolled over up to the annual Roth IRA limit each year. At the current $7,000 contribution limit for 2024 and 2025, it would take five years to roll over $35,000, and during those 5 years, you would not be permitted to make separate individual traditional or Roth IRA contributions.
What is most troublesome, however, is that Lawmother is telling her audience that the rollover money can then be withdrawn tax-free by the Roth IRA owner because the IRS ordering rules for Roth IRA distributions allow after-tax contribution money to be withdrawn first (i.e., tax-free and penalty-free). To be clear, the IRS has not issued guidance on this yet, but given that the IRS (and Congress) refers to this transaction as a “rollover,” it seems intuitive that the original cost basis in the 529 plan should transfer to the Roth IRA on a pro-rata basis.
TikTok Handle: KarltonDennis
Video Title: 529 Plans Just Became Sexy
Correction, Mr. Dennis: The IRS did NOT say you can roll over “any funds” leftover in a 529 Plan into a Roth IRA. The total maximum amount that may be rolled over is $35,000… It is limited each year to the annual Roth IRA contribution limit ($7,000 in 2024 and 2025)… It precludes the Roth IRA owner from making a separate Roth IRA… You also left out a bunch of other important restrictions.
Also, while you made a big deal about the fact that there is no income limit (which is true), on the conversions, as a practical matter, if the beneficiary is a recent college graduate, he/she/they probably qualifies for a Roth IRA contribution. In this case, the rollover would preclude the person from making a traditional IRA or Roth IRA contribution in the same tax year. In some instances, it may be advisable for a 529 plan beneficiary to wait until he or she no longer qualifies for a Roth Contribution to do the 529 plan rollover.
TikTok Handle: Taylor Mitchell
Video Title: Let’s Make Millionaire Babies
In this 50-second vignette, Ms. Mitchell proclaims that she does not like 529 plans because she does not believe in traditional college education, but she is planning to fund a 529 Plan for her baby because she wants to take advantage of the $35,000 rollover when her child turns 15. To her credit, she seems to be aware that the SECURE Act 2.0 requires that the 529 plan is in place for at least 15 years before a rollover is permitted. However, she does not mention that the $35,000 cannot be rolled over all at once. She also does not seem to know that 529 Plan assets can be used to pay for primary and secondary school tuition (up to $10,000 per year).
It’s Free But Is This Really Where You Should Be Getting Your Financial Advice?
A common theme across each of these clips is that they are high on sizzle and low on substance. Even if we are charitable and assume that the TikTok finfluencers actually know and understand the details of the restrictions and limitations on the 529 Plan-to-Roth IRA rollover rules (a big assumption, since the IRS has yet to provide clarifying guidance), I believe their pitches are irresponsible because they may cause members of their viewing flock to make costly tax planning and investment decisions without having all the necessary information. Such is the privilege of dispensing financial planning advice outside the realm of regulatory oversight.
My advice to consumers is that whenever you come upon a tax planning idea that sounds appealing, search for supporting written guidance from high domain authority sources. Whenever possible, I try to back up tax planning ideas with publications from IRS.gov. I also consider articles from the Journal of Accountancy, Ed Slott & Company, and Kitces.com to be examples of high domain authority sources. While support in mainstream financial news media (e.g., NY Times, WSJ, Kiplinger, Forbes, Fortune, etc.) may be helpful, I am less trusting of journalists’ prose.
With respect to the new 529 College Savings Plan-to-Roth IRA rollovers, here are a few articles from high-domain authority sources that I encourage everyone to read before acting on a financial advisor’s advice (including mine).
529-To-Roth IRA Rollovers: Taking Advantage Of The New Option To Move Education Savings To Retirement Savings (Kitces.com)
529-To-Roth: Now Available, But Questions Persist (Ed Slott & Co)
I have not provided links to clarifying guidance from IRS.gov because the IRS has not provided critical clarifying guidance yet. This important point is raised in each of the articles linked above. I should also mention that, even if you are armed with reliable supporting guidance, it is a best practice to consult with your CPA or tax advisor before implementing transactions that have tax consequences. Even when the rules seem clear, there are sometimes tax planning nuances that a tax planning professional may spot for you.
In my financial planning practice, I am discouraging clients from processing 529 Plan-to-Roth IRA rollovers until the IRS issues more specific guidance than what was originally presented in the SECURE Act 2.0 provision. The Addendum below gives readers a sense of just how much Congress has left unsaid. It is also worth mentioning that some financial institutions are not accepting Roth IRA rollovers from 529 plans because their existing forms and Roth IRA recordkeeping software do not yet accommodate the new rule.
NOTE: Consumers should also be aware that while there is no income limit, the decision to effect a 529 Plan Rollover to a Roth IRA precludes the Roth IRA owner from making a separate Roth IRA or Traditional IRA (including non-deductible IRA contributions) in the same tax year.
John H. Robinson is the owner/founder of Financial Planning Hawaii and Fee-Only Planning Hawaii. He is also a co-founder of fintech software maker Nest Egg Guru and the new personal finance website NestEggPF.com.
ADDENDUM: Gaps in the Current 529 College Savings Plan-To Roth IRA Rollover Rules
Below are examples of some of the areas where additional IRS guidance is needed before initiating rollovers from 529 Plans to Roth IRAs.
- Can the owner of a 529 Plan change the beneficiary from a child to themselves in order to take advantage of the Roth rollover?
- If there is more than $35,000 “leftover” in a 529 Plan, can the lifetime $35,000 rollover be used on one beneficiary and then have the owner change the beneficiary to do the same thing for the new beneficiary?
- Does the 15-year requirement begin when the account was incepted or does it re-set every time a beneficiary is changed?
- If a 529 plan was established 15+ years ago, but was later transferred to a new plan (e.g., changed from a Virginia 529 Plan to a NY 529 Plan), does the 15 year period requirement still go back to the original 529 plan inception or does the clock start over for with the new plan?
- How does the cost basis in the 529 Plan plan get transferred to the Roth IRA custodian?
- What are the distribution order rules for the Roth IRA if some 529 plan money is attributable to contributions and some is attributable to appreciation? [NOTE: It seems counter-intuitive that the IRS would permit a 529 Plan beneficiary to roll $7,000 into a Roth IRA and immediately withdraw the money tax-free as if it were a contribution.
- Since the provisions in the SECURE Act 2.0 prohibit contributions made within the past five years from being rolled over to the Roth IRA, how does the recordkeeping for this work? Is the 529 Plan sponsor required to keep track of both the amount of money contributed in the past five years along with the amount of appreciation or depreciation that is attributable to that particular pool of money?
- Do the new tax rules create a reason to segregate contributory Roth IRAs and/or Roth Conversion IRAs from Roth IRAs funded with 529 plan rollover monies?
These are just the unresolved issues that easily came to mind as I was writing this article. There are likely many more that CPAs and other advisors are pondering too. As you can see, there are enough gaps that it probably makes sense to hold off on executing 529 plan rollovers to Roth IRAs for now.
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