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Are 529-to-Roth IRA Rollovers Subject to State Tax? Thumbnail

Are 529-to-Roth IRA Rollovers Subject to State Tax?

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.

Are 529-to-Roth IRA Rollovers Subject to State Tax?

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.

By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 03/27/24, with permission. https://irahelp.com/slottreport/are-529-to-roth-ira-rollovers-subject-to-state-tax/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.
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