Hi, I'm Ed Slott and I'm Jeff Levine.

And we're two guys who just love to talk about retirement and taxes.

Look, our mission is simple to educate you, the saver, so that you can make

better decisions because better decisions on the whole lead to better outcomes.

And here's how we're going to do that.

Each week, Jeff and I will debate the pros and the cons of a particular

retirement strategy or topic.

With the goal of helping you keep more of your hard earned money.

At the end of each debate, there's going to be one clear winner.

You.

A more informed saver who can hopefully apply the merits of

each side of the debate to your own personal situation to decide

what's best for you and your family.

So here we go.

Welcome to the Great Retirement Debate.

Yeah, do you ever, uh, finish a meal and, uh, still have some leftovers?

Lately, yes.

But when I was younger, you had to finish everything.

The Clean Plate Club.

That's right.

Jack Armstrong's Clean Plate Club.

Right.

Especially at my grandmother's house.

You don't leave anything, or what?

You didn't like it?

Well, you know, that was probably not a good idea to have some leftovers.

But sometimes leftovers aren't the worst thing in the world.

For instance, a lot of people save for college for their children 529 plans.

Well, maybe those kids end up with a scholarship or maybe there's

just leftover money because the investments have been good.

There may be some leftovers in the 529 plan account, and there's

a new opportunity beginning this year in 2024 of what we might think

about doing with those leftovers.

Yes.

Now you can roll some of them.

over to a Roth IRA.

A great provision.

One of the best provisions of the good ones in Secure 2.

0.

There's a lot of good ones actually in Secure 2.

0.

And people are liking it so much that they don't understand it because even

the financial advisors when this first came out, I remember advising, Oh good.

I have a client.

They have like 200, 000.

We can just put that in a Roth.

Whoa, hold on a minute.

All right.

So that's really the topic then of today's video.

Great retirement debate, Ed, is how big of a deal is this new

provision of the ability to move money from a 529 plan to a Roth IRA?

I wouldn't call it a big deal, a big change, but it's a mediocre

deal depending on how much you have.

You gave an example.

Well, you have two, or maybe I said it.

You gave an example.

Words in my mouth.

You were talking about food, but I was talking about money.

I'm always talking about food.

Alright, let me get back to the money part.

Let's say you have a few hundred thousand because of all the

reasons you said, you didn't spend it, the kid got a scholarship.

And remember, many of these accounts were started by people that all believed

their kid was an ex Einstein, right?

You know, oh, I gotta tell you, he's definitely going to college, he's

gonna do this, he's gonna do that.

And you don't know, you know, when the kid is 17, 18, college age, if

that's, if college is even right.

Sure.

It's more of, uh, an issue actually today with the cost of college.

Yes.

College has become very you have to plan.

I mean, you don't have to, but it's best if you plan.

You obviously have more money, the more years you plan for it.

So now, they have to.

So what you're saying is you might start saving for a child's education when

they're born or in some cases even before.

And With no real idea of whether they're going to actually

need those dollars or not.

But the idea is good because that's a big item even today, the cost of college.

But let's say, uh, once you know the answer and you're past that

point and you say, you know what?

I've got too much money in this account.

Uh, now with this new provision, you could roll some of that over

to a Roth IRA, but not all of it, or in most cases, not all of it.

Alright, so let's talk about just what the rules are, and then we'll get

into whether it's a big deal or not.

So by, by background, historically, money in a 529 plan, there, there

was no, you know, Mechanism of what to do with the leftovers.

Many times, It was either just, Do you want to take the money out, pay income tax

and a ten percent penalty on the earnings.

Or do you want to maybe move it into another beneficiaries account?

And that's one of the unique things about 529 plans.

You could change that unlike any other tax preference account.

Unlike an hsa, unlike an ira, unlike a 401k, you could basically

change who the money belongs to.

You could shift it around eligible family members.

And it's a large, it's a large degree, You're like It's

a pretty good flexibility.

It's not just immediate family of, you know, husband, wife, son, daughter,

parent, but it actually extends out even as far as first cousins, uh, in

terms of eligible family members that you can transfer these assets to.

And you said husband and wife.

Most people don't know that, that they could use it themselves

when they go back to school.

Absolutely.

In fact, Uh, you know, not relevant necessarily for today's discussion

but starting to see even more seniors put money into a 529 plan thinking

like, hey, when I graduate, I either want to go back to school or I

want to do some sort of vocational work, uh, and learn a new skill.

And as long as a program is registered with the Department of Labor

appropriately, you can actually use the money in the 529 plan for that.

But all that being said, right, those have historically been your two choices.

Either move it to somebody else who might want to use it or take

it out, but pay a tax and a penalty on any earnings that you had that

weren't used for educational dollars.

Well, as part of Secure Act 2.

0, this was the law passed in late December, December 29th of 2022.

The, uh, the law basically said, That a limited amount of dollars will

get into this in a second could be moved from an individual's 529 plan

where they are the beneficiary to a Roth IRA where they are the owner.

So, just again, to clarify here, the like to like on the transfer

here is the beneficiary of the 529 plan has to be like, or the

same as the owner of the Roth IRA.

Right.

So, all the advisors like the idea, and a lot of people did because they had, the

people had big balances that they didn't think they were going to use in the 529.

So right away, tons of misinformation, I don't know if you saw that

too, even from the advisors.

Yes.

Can I roll over 300, 000, but you know, whatever.

No, no, no.

This is for people that maybe we're over by a little.

There's a lifetime cap, and that's the key here, of only 35, 000.

So we're not talking about, you know, a staggering amount, but it is a change.

It's a major change, but it's not available, it's available to

everybody, but it's not going to solve the big problem for, you

know, giant, uh, accumulations.

So that's a 35, 000 lifetime.

Per beneficiary.

Yeah, lifetime.

Yep, lifetime.

Per beneficiary.

Yeah.

Right.

On annual.

Right.

No, no, that's not 35.

No, I'm saying there's a separate.

Oh, right, right, right.

But here's the thing.

There are a bunch of conditions.

First of all, the account had to be open for 15 years.

That's the 529 plan account, right?

Yeah.

And the first five years don't count.

So, uh, you can't move those dollars.

And, uh, so I like to think of it as you got to let,

there's two marinating periods.

You can let the account marinate for 15 years before it's ready.

And you got to let the dollars inside the account marinate for at least five.

So a lot of times maybe, you know, maybe your child is just coming up on the end

of their college education and you still have a 529 plan open and you're like,

well, I've had this open for 15 years, but it's only got a hundred dollars left.

I'll just put in money today and do, no, you can't do that.

Right, right.

The money you put in today.

The five years.

Has to meet the five years.

Yup.

Right.

And assuming you meet those hurdles, then, as Jeff just said, remember,

it's going to that same child, a beneficiary's Roth IRA, and it comes in.

Sort of under the contribution to Roth IRA rules, which means you

have to, to put money into a Roth.

Anybody to contribute, not not convert a rollover, although

this is called a rollover.

Uh, to contribute you have to have compensation.

Uh, W2 or 10 99.

Self-employment income, whatever.

Generally Earnings.

Yeah.

Earnings.

Mm-Hmm.

compensation, earnings.

And the child may not have earnings that would throw them out.

Mm-Hmm.

. So.

If they have, let's say they have the earnings, but they already did their

own Roth, that would throw them out.

Or if they maxed out, so this year for under 50 is 7, 000.

So let's say the child was excited, got his first job, and he immediately got

good advice and put 7, 000 in a Roth.

Well, he doesn't qualify.

He already filled the Roth bucket.

So, there are a lot of rules around this.

There's one thing, I think you're probably hearing the same thing.

The, the most common asked question, uh, is what?

What happens if I change the benefit share Right, and there's no answer

for that, that I know of right now.

Now, by the time you see this, We may have an answer, because we're waiting

at this point, we're doing this program.

But that is the most common question, because people say, Well, if I can't

do it, can I change beneficiaries for the start of the 15 year clock?

All right, Ed.

We're here.

We're recording this.

Yeah.

For posterity.

I don't think it matters.

I don't think that's the spirit of the law.

The 15 years is the 15 years.

You don't have to restart the 15 years.

That's my opinion.

It hasn't been rolled out yet.

I actually agree with you, so I guess we're not going

to have a debate about that.

But I think it's for a different reason.

I, so maybe we will have a debate about it.

I, I actually think it will be the 15 years, but the reason I think they're not

going to go back and restart the clock is, if you think about why Congress created

this provision, it actually wasn't meant to like help all the little rich boys and

girls who have this extra money, right?

It was meant, we don't want to stop mom and dad from saving for their

child's education because they're worried that they might need the

money for their own retirement.

And so, if, uh, you know, now certainly mom and dad could, like, for

instance, I, I'll use me as an example.

Yeah.

I have three kids.

I could have a 529 plan.

I could make me the owner and me the beneficiary.

Right.

And then when my kids reach college age, I could decide, do

I want to use the money for them?

And if I do, I could change the beneficiary of the

plan, like we talked about.

Right.

To my kids.

That's one way of doing it.

I didn't do that.

I have three kids.

I have three different 529 plans, one for each of my kids.

And that's what 90, I don't know this is a statistic, but almost all

individuals, they put the 529 plan as the beneficiary of the person who

they really intend to use the money.

But let's say I needed the dollars back, right?

You wanted to, right?

Well, right.

I decided I don't want to Pay for the kids' education or again, they get a

scholarship, they don't need the money.

And I say, well, I put this for education, not for them.

Right, right.

Not for their retirement.

Right.

If I had to wait 15 years after moving it back to me, what good does that do?

Yeah, that, that, that makes a good point.

So I think that Congress, I think that the, I rather the IRS and

their regulations will take that into consideration, although I

could see them putting in some sort of anti-abuse rule where once

you change the beneficiary once.

They, uh, so you get one bite at the apple.

Exactly.

Something like that.

Yeah.

There's another rule.

I didn't go through a little technical, but I talked about the

ability to contribute to a Roth.

You have to have the earnings.

We said Mm-Hmm.

. But one of the things that, uh, may throw you out.

for contributing to a Roth, not conversion, but there are income limits

on who can make a Roth IRA contribution.

Now, this is a regular Roth contribution, regular Roth contribution.

There are high limits and most of the children we're talking

about probably are not over that.

But what's unique in this provision, even if they are over that income

limit, they can still do this.

Yeah, it's really, it's, uh, it was, you have to have earnings,

but you can't have too much.

Right.

It was weird.

Right.

But you can't have too much for a regular Roth.

Right.

Yeah.

Very strange.

Very, very strange choice on the part of Congress, I thought, but nevertheless.

All right.

So, so those are the rules.

Just to recap, right?

If you want to use this, you can take money.

It can go from one individual's 529 plan where they have the beneficiary,

To a Roth IRA where they're the owner.

In order to make that move, the person has to have compensation,

which is generally earnings.

They can only do it if the account, the 529 plan account,

has been open 15 years or more.

If there have been dollars in the account for at least 5 years, the

maximum they can move in any one year Is the Roth IRA contribution for

that year less any IRA contributions they've already made separately and

over the course of their lifetime the most that they can do is 35, 000.

I think that covers it, right?

Right.

Uh, I want to hit on one point there because some people thought originally,

again, it came out, there's a lot of misinformation, they thought originally

you could use the 35, 000 at once.

Now, we have an easy example this year because the IRA contribution

limit for happens to be 7, 000 easily divisible into 35.

Right.

Yes.

So you could do 7, 000 a year, uh, for the five years.

That's how you use up the 35, 000, but interesting.

You get that for each beneficiary.

So you can expand that 35, 000, but in chunks of 7, 000 a year.

Maximum.

Yeah.

Well I shouldn't say that.

7,000 a year for this year.

Correct.

It's going to go up with the inflation increases.

Alright, so we've covered the rules.

Now let's answer the real question of today's discussion of today's debate,

which is, how big of a deal is this?

I don't think it's that big a deal except for the right people

that just want to clean out.

Maybe they're just over it.

They have a few dollars over.

They don't think they're going to use it.

What a great deal.

And you made a good point.

Maybe I'll put in my own, uh, Roth IRA and just clean house.

So for those people, it's a pretty, it's a nice convenience, you might say.

But for people that, uh, have, you know, a way overloaded, uh, in accumulations to

300, 000, uh, they'll get a little out.

They're a little.

You know, they'll chop it down.

They'll trim down the balances a little.

But if you have enough beneficiaries, look, you have 10 kids.

You could chop it down.

You could trim it down quite a bit.

But most people with, you know, a few beneficiaries, 10 kids, you

know, would trim down the kids.

Yeah, right, right.

Too many kids.

Yeah, yeah.

So I don't know.

I would say it's an interesting provision and it does help certain people, but not,

uh, Earth shattering or a game changing.

All right.

So, so I have a little bit of a different flavor on this.

I, I, you know, I know we recorded, uh, an episode and people can go back and

listen to it after the Secure Act 2.

0 was first passed.

And we did kind of a wrap up of some of the special episode.

I think it was two parts if I'm not mistaken, because

there's so many darn provisions.

Only 90.

2.

0.

Yeah.

Um, and we talked about this and I, I, I might have been, You know, bearish on this

at the time in terms of the real value.

I've, I've started to come around a little bit and I think it's a little

bit bigger deal in the right set of circumstances than we give it credit for.

For instance, you know, when most children are born.

They don't have compensation, right?

They don't, uh, uh, a one year old, a zero year old, they

don't have earnings, typically.

Right.

Unless they're a child actor or a model or something.

Oh, I see where you're going.

I see where you're going on this.

And you can't put money aside for their retirement.

But you could put money into a 529 plan.

And I've run numbers, right?

If you put in, let's say, 11, 000 when the kid is born, and the account earns,

let's say, 7 percent a year, by the time the kid is, let's say, 16 and they get a

summer job, now they have compensation.

Now we can begin to leak some of that money from their 529 plan over as

these Roth IRA contributions for them.

If, if you follow this through, assuming they make enough, assuming

they make enough, that's what I'm giving the example of a summer job.

I guess it's a nice summer job, right?

Really good summer job.

You know, some of them work hard, you know, got to earn a living.

And let's say that that 529 plan goes over to the Roth, it'd probably

take about four or five years, depending upon what the future IRA

contribution limits are at that time.

Right.

The, by the time the kid was 65 years old, that 11, 000, you want to take

a guess of what that would turn into?

Uh.

Depending on the interest rate, I don't know, you're going to tell me 500, 000?

No, at 7%, it's a million dollars.

Wow.

By the time the kid would be 85, uh, or excuse me, 80 years old, that Wait, wait,

without making any more contributions?

Without any more contributions.

7%?

7%.

For putting in only four or five years?

For putting in at starting with 11, 000 when the kid is born into the 529 plan.

Into the 529.

That's right.

So you're getting those first years.

We're not talking about the Roth.

And then ultimately transferring the 11, 000 plus the growth over into the Roth.

So you're getting 35, 000 still in.

Because over the first 15 years, it grows.

Right.

So, so basically what I did was I backed out.

I said, okay, in order to get to 35.

That, so.

The 8, uh, the 529 balance plus the Roth?

It's just the 11, 000.

So 11, 000 over the course of let's say 16 to 20 years, right?

It becomes 35 in the 529 plan.

Right.

That gets moved over at 7 or 8 thousand dollar a year increments, right?

Into the Roth IRA.

Right.

But for a limited time.

Just, right.

So we get the 35, 000 into the Roth IRA.

Right.

That 35, 000 becomes 1 million by the time the kid's 65.

Right.

And what age?

And when they're 80, it's two and a half million.

So what do we start?

Like around 20 or something?

Age 20?

Uh, 16, moving the money over, yeah.

Oh, 16.

Okay, so yeah.

Well, that's a lot.

But that's, that is an incredible head start for a kid in life.

I mean, it's much more.

I mean, you, Ed, you, you, you know, you understand the power of compounding

better than most, most anyone out there.

And you even, you know, on top of your head, you're like, I don't know, 500, 000?

Twice that!

I know, I know.

Right?

Twice that.

Well, I didn't see here the, uh, rate.

I.

I.

I.

I.

I.

Yeah.

But, but I'm saying it, it's a lot more, I I didn't believe it when I first ran.

Am am I doing this math right.

I still, yeah.

. So I mean that's one way.

The other thing I think that this can be, you know, I think

that's the big deal, right?

Is if you wanted to, and, and it doesn't mean you don't save for the

kids' education in the 5 29 point and then also assumes the kids when

they have the Roth ira, don't use it.

Don't, don't empty it.

You know?

Oh, that's a nice house.

Yeah, well that's a, that's a whole, that's a different podcast, . But the

other thing I thought where this could be really interesting is, you know, ed,

a lot of people who are high earners.

They use this backdoor Roth IRA, right?

With the regular backdoor Roth, 100 percent of the money that you get into

the Roth IRA has been taxed, right?

If you did this proactively, and admittedly it probably takes a lot of

proactivity because you're generally going to be looking 15 years in the

future, but you could use this as a better backdoor Roth in some cases,

because you put in the same, if you take the same set of facts, right?

Put in 11, 000, wait 15 years, let it be worth 35, right?

Now, you can use that as the source of your backdoor Roth and you've only

ever paid tax on that initial 11, 000.

Yeah.

So, so I, you know, I, I think the first part of that was the bigger

issue or the, the bigger deal, right?

Again, getting a kid a headstart in life of, I look, I know in 65 years

at a million dollars then won't be a million dollars what it is today.

And I know in 80 years, two and a half million won't be what

it is still a heck of reality.

Back to my other point.

It's going to be hard when you're not there anymore, even if you're in your

nineties, to tell kids in their thirties, forties, oh, you can't touch that.

M.

C.

Hammer did it very effectively.

You know, we just got to get him going.

Yeah.

All right.

Well, good discussion today, Ed.

Ultimately, I think there's some really good points to be made on both

sides about how big of a deal this is.

Ultimately, it's limited by that 35, 000 lifetime cap.

But, if you start early and use that 35, 000 cap to its fullest extent,

it can still create significantly positive incomes for individuals.

In the right circumstances, yes.

Alright, well, the right circumstance is for you to come back for our

next Great Retirement Debate.

Ed, as always, this was fun.

Alright, thanks.

See you next time on the Great Retirement Debate.

Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.

This podcast is for informational and educational purposes only and should

not be construed as specific investment, accounting, legal, or tax advice.

Certain information mentioned may be based on third party information

which may become outdated or otherwise superseded without notice.

Third party information is deemed to be reliable but its accuracy and

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The topic discussed in corresponding arguments are those of the speakers

and may not accurately reflect those of Buckingham Wealth Partners.