The 529-to-Roth conversion rule appears to be a rule with a “lifetime limit” of $35,000 that will apply “per beneficiary,” rather than “per account” or “per the converting taxpayer. Theoretically, an owner of a 529 account that holds more than $35,000 in unneeded assets could change the beneficiary multiple times and then do a series of rollovers out of the 529 plan that would sum to an amount greater than $35,000. Given the significant potential benefit through this workaround, Congress or the IRS will likely restrict this with clarifying rules.
Nonetheless, the 529-to-Roth strategy is still appealing. But whatever rollover amount is being considered, it is clear at this stage that the 529 account has to have existed for 15 years in order to qualify for this type of conversion. Given this 15-year requirement, clients may consider opening a 529 plan today with a nominal contribution (say, $50 or $100). That way they can get the 15-year clock started, even if they have to name themselves as the initial beneficiary.
Paying off student loans to capture retirement plan contributions. Starting in 2024, employers can extend their 401(k) match programs to include any payments an employee makes toward student debt. The matches function much the same way traditional 401(k) programs do, with the company depositing its contribution into the worker’s retirement account. Employers have the discretion whether to include this provision, which would benefit many medical residents and younger doctors at the start of their careers.
RMDs from Inherited IRAs likely to resume. Before 2019’s Secure Act, any heirs who inherited traditional IRAs could “stretch” the account’s tax-deferring power by basing the calculation of their RMD amounts. They could thus enjoy decades of tax-free asset appreciation that often would see the inherited account’s value grow substantially rather than shrink, thanks to the modest RMD payments. Under proposed IRS regulations issued earlier in 2022, most inherited IRA beneficiaries must instead fully draw down the account’s value over a 10-year period, and they must take required minimum distributions in years one through nine if the account owner died after their own required beginning date. The IRS published a notice later in 2022 essentially pausing this new rule, but is now preparing to finalize enforcement. it is likely that the IRS will release proposed regulations in the coming months, and that clients with inherited IRAs will indeed have to start drawing income from the accounts.