Previous Slott Report articles have covered the new SECURE 2.0 provision allowing 529 funds to be rolled over to Roth IRAs. We’ve reported that there are several unanswered questions concerning this new rollover opportunity. And we’ve discussed the ability to do two rollovers in 2024 – one for 2023 if completed by April 15 and a second by December 31.
Under SECURE 2.0, a Roth IRA contribution of 529 funds must comply with certain requirements. For example, the maximum lifetime amount that can be rolled over is $35,000; the 529 plan must have been open for at least 15 years; the rollover amount cannot exceed the annual Roth IRA contribution limit; and the rollover must be aggregated with “regular” IRA or Roth IRA contributions made for that year. If these rules are met, the rollover is tax-free for federal tax purposes.
However, that’s not necessarily the case for state tax purposes. States are all over the map in their treatment of 529-to-Roth IRA rollovers. Of course, this is not an issue for the 9 states that have no state income tax to begin with: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. (Note that New Hampshire taxes interest and dividends, and Washington state taxes some long-term capital gains.)
The following information comes from a very useful website run by Paul Curley, CFA: Status Board: State Income Tax Treatment on 529 Distributions to Roth IRAs (529conference.com) and is current as of March 13, 2024:
There are 21 states that have said that they will follow federal law: Alabama, Arizona, Delaware, Georgia, Hawaii, Idaho, Kansas, Kentucky, Maine, Maryland, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Virginia, West Virginia and Wisconsin.
Many states allow residents to take a state tax deduction or credit for 529 contributions made to that state (or, in some cases, to any state’s) 529 plan. Of those states, 10 have indicated that 529 savers may be subject to state income tax “recapture” if 529 funds are transferred to Roth IRAs. This means residents of these states who took a state tax deduction or credit would have to pay it back if they do a 529 rollover. These states are: Illinois, Indiana, Iowa, Massachusetts, Michigan, Minnesota, Montana, New York, Utah and Vermont.
California stands alone. Its residents who do a 529-to-IRA rollover will be subject to state income tax and an additional 2.5% California tax on earnings. (California does not allow a state tax deduction for 529 contributions.)
Finally, in 9 other states, plus the District of Columbia, either the state tax issue is not clear or a decision is pending: Arkansas, Colorado, Connecticut, Louisiana, Mississippi, Missouri, New Jersey, Oklahoma and Rhode Island.
Keep checking Paul Curley’s website for updates.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
Specializing in private wealth management, we provide education, guidance, and strategies to help you achieve a tax-efficient retirement income.
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