Tax-Free Rollover from 529 to Roth IRA

One of the more exciting provisions of the SECURE 2.0 Act, signed into law December 2022, is the tax-free rollover from a 529 educational savings account into a Roth IRA. This provision became effective in 2024 and will help to reduce or eliminate the problem of having unused funds in a 529 account.

For the most part, this provision is exactly as advertised. It allows for leftover funds in a 529 account to be rolled over into a Roth IRA in the name of the 529 account beneficiary.

Let’s dive into the details.

  • As noted above, this provision is now effective for the 2024 tax year.
  • There is a lifetime limit of $35,000 per beneficiary and the Roth IRA must be in the name of the beneficiary of the 529 account.
  • The annual Roth IRA contribution limits are in play and both Roth IRA contributions of the beneficiary plus 529 rollovers into the beneficiary’s account must be aggregated.
    • For 2024, this is $7,000 plus an additional $1,000 for those age 50 and older.
  • The income limitations to contribute to a Roth IRA are not in play and therefore, even if the beneficiary makes too much to contribute to a Roth IRA, you can still complete a rollover from a 529 account to a Roth IRA account in their name.
  • The beneficiary must have earned income that is at least the amount that you want to rollover.
  • The 529 account must have been open for at least 15 years at the time of the rollover and contributions and earnings within the last 5 years don’t qualify.
  • The rollover must be a direct plan-to-plan rollover, which means you cannot take a distribution from the 529 plan and then write a check to the Roth IRA account.

This provision opens doors for new tax planning opportunities. We recommend consulting with your KT tax professional before beginning the process.

March 12, 2024

Solo 401(k) Flexibility

In December, President Biden signed the SECURE 2.0 Act of 2022 (SECURE 2.0) into law. SECURE 2.0 has over 90 changes to help retirement savers and to urge more employers to offer retirement plans. One of these changes allows more flexibility for the Solo 401(k).

What is a Solo 401(k)?

A Solo 401(k) is a regular 401(k) plan that has been adopted by a sole proprietor or any other entity that does not have full-time employees. These retirement plans work great for consultants, independent contractors, or sole proprietors in general. Keep in mind there are two hurdles to jump to be eligible to benefit from a Solo 401(k):

  • Must have self-employment activity.
  • Can’t have full-time employees.

What makes the Solo 401(k) so great?

  • Ability to make pretax or Roth annual contributions of up to $66,000, or $73,500 if you are at least age 50 in 2023.
  • You can borrow the lesser of $50,000 or 50% of the plan account value tax penalty free and use the loan however you choose.
  • As the plan trustee, you can invest in both traditional and alternative assets, such as real estate.
    • You can use a nonrecourse loan to acquire real estate without triggering UBTI tax.

What did SECURE 2.0 change?

The first version of SECURE allowed a sole proprietor to set up a retirement plan in the current year and make employer profit sharing contributions for the previous taxable year. SECURE 2.0 went a step further and now allows both employee and employer contributions to be made for the prior year as long as the contributions are made by the deadline of the individual’s tax return. This provision goes into effect for tax year 2023.

Consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Don’t navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our services on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation.

April 4, 2023

Increase in Age for RMDs

In December 2022, President Biden signed the SECURE 2.0 Act of 2022 (SECURE 2.0) into law. SECURE 2.0 contains over 90 changes to help retirement savers and urges more employers to offer retirement plans. One of these changes increases the age at which you must begin taking Required Minimum Distributions (RMDs) from retirement plans.

Prior to SECURE 2.0, RMDs from 401(k) accounts, traditional IRAs, and similar retirement accounts were required beginning in the year you turn 72. SECURE 2.0 will eventually push the RMD age up to 75 in two phases.

Phase 1: RMDs will not start until age 73 for those that turn 72 after 12/31/2022.

Phase 2: RMDs will not start until age 75 for those that turn 74 after 12/31/2032.

This change provides a boost to seniors as they will be able to keep money in their tax-free retirement accounts just a little bit longer.

There are steep penalties from the IRS if you fail to take your RMDs, but SECURE 2.0 gives taxpayers some relief. SECURE 2.0 reduces the penalty for failure to take an RMD from 50% of the distribution shortfall down to 25%, and further down to 10% if the distribution shortfall is corrected by the end of the second year following the year it was due.

SECURE 2.0 also eliminates the need to rollover funds from a Roth 401(k) to a Roth IRA to avoid RMD rules. Starting in 2024, Roth 401(k) accounts will not be subject to RMD rules before the account holder dies.

Please consult with your tax professional at Ketel Thorstenson about this or other tax matters because each situation is different. Do not navigate the difficult and ever-changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our services on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and tax legislation.

March 28, 2023


In December, a government spending bill was signed into law with several significant retirement provisions. Here are some of the significant tax and retirement-related provisions included in the SECURE 2.0 Act of 2022.

Expanded Automatic Enrollment in Retirement Plans
For retirement plans set up after the enactment date of SECURE 2.0, employers must provide for automatic contributions of at least 3% and not more than 10% during an employee’s first year of participation, unless the employee chooses otherwise.

Effective on the first day of each plan year after a completed year of participation, the contribution percentage must automatically increase by 1 percentage point to at least 10% but not more than 15%. This provision is effective for plan years beginning after December 31, 2024.

Increase in Age for Required Minimum Distributions (RMDs)
Retirement plans subject to RMDs just got a bump up in the age requirement. Under current law, the age to start RMDs is 72. That will change to age 73 for those that turn 72 after 12/31/2022 and to age 75 for those that turn 74 after 12/31/2032.

Higher Catch-up Limit
Starting in 2025, individuals reaching the age of 60 will be allowed $10,000 of catch-up retirement contributions. However, for individuals with income greater than $145,000 these added contributions will be subject to mandatory Roth treatment.

Penalty Free Withdrawals for Certain Emergency Expenses
SECURE 2.0 provides an added exception to the 10% penalty tax for early distributions from retirement accounts. There is now an exception for certain distributions used for emergency expenses, such as unforeseeable or immediate financial needs relating to personal or family emergency expenses. These emergency expenses are capped at $1,000.

New Retirement Plan Designs
Two new retirement plan designs were created by SECURE 2.0 and will become available in 2024. First is a new type of section 401(k) plan called “starter 401(k) deferral-only arrangement” and second is a new type of 403(b) called a “safe harbor 403(b) plan.”

These plans are designed to reduce cost barriers for small businesses to offer employees retirement plans. Two of the significant benefits of these plans are no major year-end testing requirements and no employer contribution requirements.

Improving Coverage for Part-Time Workers
The first edition of SECURE required “long-term part-time employees” to be eligible for employer retirement plans. These individuals were defined as those working at least 500 hours per year for three consecutive years and meeting all other eligibility requirements of the retirement plan. SECURE 2.0 has reduced that requirement from three consecutive years to two.

Reduction in Excise Tax for Not Taking RMDs
Under current law, the penalty tax for not taking enough RMD is 50% of the amount by which the calculated RMD exceeds the actual amount distributed during the calendar year. SECURE 2.0 reduces the 50% amount down to 25% and further reduces the 25% down to 10% if the failure to take the RMD is corrected in a timely manner.

Optional Treatment of Employer Contributions as Roth Contributions
In SECURE 2.0, employers can amend retirement plans and allow employees to designate employer contributions to their account as Roth contributions.

Modification of Credit for Small Employer Pension Plan Start-up Costs
The Act changes the small employer pension plan start-up cost credit by:

  • Providing credit equal to the entire amount of creditable costs (qualified start-up costs) of an employer with 50 or fewer employees (up to an annual cap)
  • Allowing a credit amount for employer contributions to small employer pensions
  • Fixing a technical glitch for small employers who join multi-employer plans

Tax-Free Rollovers from 529 Accounts to Roth IRAs
SECURE 2.0 allows the beneficiary of a 529 college savings account to make direct rollovers from a 529 account to a Roth IRA in their name without tax or penalty. The 529 account must have been open for 15 years, lifetime rollovers under the provision cannot exceed $35,000, and annual contribution limits are in play (income limitation is waived).

January 19, 2023

Converting Your Home into a Rental Property

Are you thinking about moving into a new home and renting out your current home? Here are some things to consider.

Let’s start with the many nontax factors to consider when deciding whether to sell or rent out your current home. Do you need cash from the sale to fund the down payment on a new home? If so, you have no choice. Are there sentimental reasons not to sell? If the market is very soft, you may want to rent to wait for prices to rebound. Once you sort through all the nontax factors, here are some tax related items to consider.

As discussed further below, don’t turn a large excludable gain into a taxable one by failing the “2 out of 5” year rule. Even if you rent it for a while, you may still may to sell within the 5 year window.

If you rent, everyone loves the tax deductions! Income from a rental property must be reported to the IRS using Schedule E on your Form 1040. However, there are several deductions available to reduce the net income that is subject to tax. These deductions include insurance, property taxes, utilities, repairs, professional fees, property management fees, travel, and depreciation.

Depreciation is a very powerful tool in reducing tax liability on a rental property. When you convert a personal residence into a rental property you must first determine the cost basis of the property. This is determined by using the lesser of the initial cost of the property plus major improvements or fair market value at the date of conversion. The basis is then divided into land, building, furniture, fixture, and equipment (FF&E), land improvements, etc. Land cannot be depreciated, but we get to deduct the cost of the building over 27.5 years. FF&E and land improvements can be deducted in full in year one utilizing bonus depreciation under current law. Keep in mind any depreciation taken on the property will be recaptured at higher rates rather than long term capital gains in the year of sale.

Rental properties can provide positive cash flow while producing a tax loss due to depreciation expense, what a great deal! However, these losses are not always deductible in the year they are created. Losses created by rental properties are considered passive and are only deductible if you meet one of the following criteria: 1) Qualify for the special $25,000 allowance – If your modified adjusted gross income is less than $150,000 and you actively participate in the rental activity, you may be able to deduct some or all of your rental losses up to $25,000, 2) You have other passive activities that produce income during the year, or 3) You sell the rental activity during the year which allows you to deduct current year losses as well as any losses suspended from previous years. The good news is that any disallowed passive losses can be carried forward indefinitely until a future year in which you qualify to use them.

If you sell the property for more than your net tax basis, you have created a gain. Is this gain taxable? If so, how much of it is taxable? As is the answer to so many tax questions, it depends!

There are a few different ways to address a possible tax bill when deciding to sell your rental property.

  1. Read Carrie Christensen’s article in this KT Addition regarding the ability to exclude gains on sale of a primary residence. If you qualify for the “2 out of 5” year rule, your gain should be excluded.
  • While I won’t be covering it in detail in this article, a Section 1031 “Like-Kind Exchange” can be a powerful tool to defer tax if you no longer want to own this rental property (and you flunk the “2 out of 5” year rule—) but are still willing to own an investment property. This would delay any taxes until the replacement property is ultimately sold. Section 1031 exchanges are a complicated process and you should consult with your tax professional before you choose this route.
  • Once you have two homes, you then could sell your personal home instead of the rental property. If cash flow is what you need and your situation is right, selling your personal residence instead of the rental property could allow you to exclude all of the gain and provide you with the funds you need.  Remember you need to meet the requirements to exclude the gain on sale of your personal residence for this to work.
  • You could continue to rent out the property until you pass away, at which point the inheritor of the rental property would get the basis stepped up to fair market value.

As always, each situation is unique and you should speak with your tax professional prior to converting your personal residence into a rental property.

June 8, 2022