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529 PLANS AND INHERITED IRAS: TODAY’S SLOTT REPORT MAILBAG

February 1, 2024

Andy Ives, CFP®, AIF®

IRA Analyst

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I have two questions regarding the 15-year requirement that applies to new rules allowing rollovers from 529 plans to Roth IRAs. If you change beneficiaries, will it reset the 15-year clock? Secondly, if you roll your 529 plan into another 529 plan (say Virginia plan to Nevada plan which also involves a change in custodians), does this reset the 15-year clock? No new money is going into the plans and the change in beneficiaries is to  other children and grandchildren.

Thanks for your consideration. We are excited to act on this new SECURE Act provision.

Scott

Answer:

Hi Scott,

You are not alone! Many people are excited about using the new SECURE 2.0 rules allowing rollovers from 529 plans to Roth IRAs. The devil is in the details here though. The rules say that the 529 plan must be established for at least 15 years. It is unclear whether a change of beneficiaries or even transfer to a new custodian would result in a reset of the 15-year holding period. Unfortunately, we will still need some guidance from the IRS on these questions.

Question:

My client was forced to take a distribution from his inherited IRA (non-spousal). He has a huge check coming his way for several hundred thousands of dollars. I was wondering what the best course of action is for the client to take at this point. Can the client roll the money into his own IRA?

Any help would be greatly appreciated.

Jim

Answer:

Hi Jim,

This is a tough situation. The rules do not allow a nonspouse beneficiary to roll over inherited IRA funds to either another inherited IRA or to his own IRA. This is, unfortunately, a taxable distribution that cannot be corrected under the existing IRA rules.

There may be hope for situations like this in the future. SECURE 2.0 expanded the Employee Plans Compliance Resolution Program (EPCRS) to cover IRA errors for the first time. The EPCRS expansion could allow a nonspouse IRA beneficiary to return an inherited IRA that had been mistakenly distributed. This would allow a remedy for one of the most common IRA errors that cannot currently be fixed. Unfortunately, the correction program isn’t available yet for IRAs.

 

529 Plans and Inherited IRAs: Today’s Slott Report Mailbag

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