529 to Roth conversion rules

[VerbalK]

Am I missing something here?

Does it make sense to set up a 529 for myself and/or spouse as beneficiary, up to the the state tax credit ($2500 per contributor per bene), and then in 15+ years, convert them to a Roth (at the annual contribution limit). Seems like it would be triple tax advantaged . I understand I wouldn't be able to make a Roth contribution in the year I opt to convert, but in 15-20 years, I probably won't be making contributions anymore (age 46 now). And I always could transfer the 529 to my kids if they need it.

Why isn't this a bigger deal? Seems like I could get $10K a year state tax deduction plus tax free growth. I understand investment options are limited, but I normally drop everything in a s&p 500 or target date funds anyway.

[White Coat Investor]

Am I missing something here?

Does it make sense to set up a 529 for myself and/or spouse as beneficiary, up to the the state tax credit ($2500 per contributor per bene), and then in 15+ years, convert them to a Roth (at the annual contribution limit). Seems like it would be triple tax advantaged . I understand I wouldn't be able to make a Roth contribution in the year I opt to convert, but in 15-20 years, I probably won't be making contributions anymore (age 46 now). And I always could transfer the 529 to my kids if they need it.

Why isn't this a bigger deal? Seems like I could get $10K a year state tax deduction plus tax free growth. I understand investment options are limited, but I normally drop everything in a s&p 500 or target date funds anyway.

I generally recommend against this but when you run the numbers you will come out ahead. You just have to ask yourself if the hassle/risk is worth it.

It's not a bigger deal because it isn't enough money to move the needle for most. Run the numbers and you'll see. This whole scheme might be worth $6K or so. It's not zero, but it rounds there in a multi million dollar portfolio, which is usually what those considering the scheme have.

[Geologist]

One thing is that you say "in 15-20 years, I probably won't be making contributions anymore". Does that mean you expect to be retired with no earned income?

If that's the case, you won't be able to convert the 529 to Roth, because that is only possible if you are eligible to make Roth contributions (you have earned income).

Another issue is that there are a number of details about this that are not yet clear and it is not known when this opportunity will first become available.

[chemocean]

Am I missing something here?

And I always could transfer the 529 to my kids if they need it.

Or transfer to grandchildren for college, that way the funds would not be taxed and would not need to be reported on a FAFSA. Or let the grandchildren transfer the $35K to their Roth when they start their careers. You are still the trustee, so you still get to control the 529 for the benefit of the grandchildren beneficiaries.

Regulations have not been clarified if the 15-year clock is reset upon changing beneficiaries.

[shess]

Why isn't this a bigger deal? Seems like I could get $10K a year state tax deduction plus tax free growth.

Note that this is a FEDERAL regulation. Your state may attempt to clawback the deductions when you convert to Roth. There is precedent for this, some states clawback deductions if you rollover to a different state's plan:
https://thecollegeinvestor.com/35111/52 ... 9D%20Taxes

Also, your state may simply decide not to mirror the federal regulations WRT state taxes:
https://www.forbes.com/sites/robertfarr ... to-an-ira/

[VerbalK]

One thing is that you say "in 15-20 years, I probably won't be making contributions anymore". Does that mean you expect to be retired with no earned income?

If that's the case, you won't be able to convert the 529 to Roth, because that is only possible if you are eligible to make Roth contributions (you have earned income).

Another issue is that there are a number of details about this that are not yet clear and it is not known when this opportunity will first become available.

I imagine I can figure out a way to "earn" $6500 even if I'm 100% retired.

[pizzy]

One thing is that you say "in 15-20 years, I probably won't be making contributions anymore". Does that mean you expect to be retired with no earned income?

If that's the case, you won't be able to convert the 529 to Roth, because that is only possible if you are eligible to make Roth contributions (you have earned income).

Another issue is that there are a number of details about this that are not yet clear and it is not known when this opportunity will first become available.

I imagine I can figure out a way to "earn" $6500 even if I'm 100% retired.

What do the quotes signify? The definition of earned income is different than just income.

[SimonJester]

Why isn't this a bigger deal? Seems like I could get $10K a year state tax deduction plus tax free growth.

Note that this is a FEDERAL regulation. Your state may attempt to clawback the deductions when you convert to Roth. There is precedent for this, some states clawback deductions if you rollover to a different state's plan:
https://thecollegeinvestor.com/35111/52 ... 9D%20Taxes

Also, your state may simply decide not to mirror the federal regulations WRT state taxes:
https://www.forbes.com/sites/robertfarr ... to-an-ira/

My state has already said they will claw back for this...