Five things to know about 529-to-Roth IRA Rollovers

A 529 education savings plan is a tax-advantaged way for families to save money for college costs and educational expenses.

With the passing of the SECURE 2.0 Act, unused funds in a 529 education savings account can be rolled over to a Roth individual retirement account (IRA) federal tax- and penalty-free for the benefit of the 529 plan beneficiary.

There are limitations and provisions for these rollovers, including a requirement that the 529 account must have been open for at least 15 years.

The rollover amount is limited to the yearly IRA contribution limit with a lifetime maximum of $35,000.

The 529 account must have been open for at least 15 years. Further clarification from the Internal Revenue Service (IRS) is needed for how a 529 account must be maintained to meet the 15-year requirement. For example, it is unclear if a rollover from one 529 plan to another or an account holder change would impact an account’s completion of the 15-year requirement.

The Roth IRA must be in the same name as the 529 account beneficiary. Again, the IRS has not clarified if it must be the same 529 account beneficiary over the entire 15-year period, meaning a beneficiary change would reset the clock. The IRS may issue additional guidance that could impact eligibility for 529 account rollovers to Roth IRAs.

If the 529 account is a prepaid tuition program, you will need to contact the program to see if any funds would be eligible to roll over to a Roth IRA. These programs allow you to buy units or credits of tuition at today’s costs to fund a child’s future tuition needs. These programs may have stringent distribution rules that can be very plan specific.

The rollover amount is limited each year to the IRA contribution limit. For tax year 2024, the contribution limit is $7,000 for those age 49 and younger.

As with Roth IRA contributions, the beneficiary must have earned income that matches or exceeds the rollover amount up to the annual limit. (However, the beneficiary is not subject to Roth IRA income limitations.)

The annual rollover amount must be aggregated with other IRA contribution amounts to count toward the contribution limit. For example, if the beneficiary contributes $5,000 to a regular IRA, the 529-to-Roth rollover is limited to $2,000, meeting the $7,000 annual IRA contribution limit for those age 49 and younger for tax year 2024.

Any contributions (and associated earnings) made to the 529 account within the past five years of the rollover date may not be considered in the rollover amount. For example, assume the 529 account balance was $5,000 five years prior to the rollover date. A contribution of $2,000 is made during the year prior to the rollover date. The 529-to-Roth rollover would be limited to $5,000 (assuming the beneficiary had that amount or more of earned income). The additional contribution amount and associated earnings may be eligible in the next five years, however.

There is a lifetime maximum of $35,000 for 529-to-Roth IRA rollovers per beneficiary. For example, it would take five years to reach the $35,000 cap, assuming $7,000 in annual rollover amounts.

If the aforementioned requirements are met, the rollover amount will be federal income tax- and penalty-free.

However, it is not yet clear whether federal income tax-free treatment of 529-to-Roth rollovers will continue at the state and local levels. It is possible that some states may want to “recapture” any state tax deduction or credit the account holder received at the time of contributions. Additionally, some states may not consider the rollover as a qualified expense, meaning the amount could be considered taxable income from a state income tax perspective.

It may be wise to consult a tax professional and your 529 plan disclosures to understand how the rollover may affect your specific state tax situation.

A Roth IRA must be established (if not already existing) for the benefit of the beneficiary. Many financial institutions allow the opening of an account with the understanding that the funds may be received later.

The 529 account owner completes a rollover-to-Roth IRA form or general withdrawal/distribution form from the 529 plan provider. The account owner may need to include the 529 account information, the Roth IRA information, the rollover amount, and a signature.

The 529 plan provider will then process the rollover directly to the Roth IRA. The rollover must be made as a trustee-to-trustee transfer. This means that a check cannot be made out to the beneficiary and then the beneficiary subsequently contributes to the Roth IRA.

There is no age limit to open a Roth IRA. However, the Roth IRA owner must have earned income to be able to make contributions.

If the Roth IRA is for the benefit of a minor, generally under the age of 18, then an adult can open a custodial Roth IRA on their behalf.

It may be wise to consult a tax professional and your 529 plan disclosures to understand how the rollover may affect your specific state tax situation.

Learn more about Roth IRAs.

Contact a Financial Consultant at 1-800-401-1819.