Your Guide to 529 Plan–to–Roth IRA Rollovers

If you have a 529 plan, or are considering opening one, you’ll likely be interested in a rule that went into effect on January 1, 2024, as part of the SECURE 2.0 Act. It allows savers to roll unused 529 funds to a Roth IRA without tax penalty. The provision means that many parents can help with their children’s education expenses and, at the same time, contribute to retirement planning. Grandparents, other relatives, and individuals saving for their own education can benefit as well. Here’s how the 529 plan–to–Roth IRA rollover works, and what to keep in mind while determining whether it’s a viable option for you.

Understanding the 529 plan

Introduced in 1996 as part of Section 529 of the Internal Revenue Code, the 529 plan is a tax-advantaged savings vehicle designed for future education expenses. States, state agencies, and education institutions typically sponsor the plan, which comes in two types:

• Prepaid tuition plan allows the account holder to buy credits or units for future expenses, which can be redeemed when the beneficiary attends the education institution of their choice
• Education savings plan allows the account holder to contribute to an investment account to cover qualified education expenses, such as tuition, fees, and books

The main benefit of a 529 plan is tax-free withdrawal of funds for qualified education expenses. Some states also provide a tax deduction or credit for contributions. However, 529 plans are not restricted to an individual’s state of residence, which means someone can opt for a plan in a different state if they find that the plan is better suited to their needs.

Rolling over saved funds

Who wouldn’t want an opportunity to move funds for education spending to a Roth IRA, which offers the promise of lifetime, tax-free growth? Sure enough, there are caveats to consider and pitfalls to avoid. For example, while federal law allows for 529 plan–to–Roth IRA rollovers, there’s no indication that every state will exempt these transactions from taxation. Therefore, it’s possible you’ll owe state income tax on a 529 plan rollover. Several other factors can help you determine whether a 529 plan–to–Roth IRA rollover strategy is right for you:

Only for an established 529 account

For a 529 account to be eligible for rollover to a Roth IRA, it must have been opened at least 15 years ago. Additionally, only amounts contributed to the 529 account more than five years ago can be rolled over. This includes both the initial contribution and its associated growth. For example, when considering a 529 plan–to–Roth IRA rollover on January 25, 2024, the rollover amount must be attributable to a contribution (and its growth) from before January 25, 2019.

Roth IRA contribution limits

The rollover amount from a 529 plan to a Roth IRA is capped at the annual contribution limit for the Roth IRA. For 2024, the limit is $7,000 for individuals younger than 50. If the Roth IRA contribution limit is reached through the rollover of 529 plan funds, no additional contribution can be made to the Roth IRA for that tax year. The cumulative lifetime Roth IRA rollover limit per 529 beneficiary is $35,000.

Earned income requirements

As with contributions to a retirement plan, earned income is generally necessary for a 529 plan–to–Roth IRA rollover: there must be at least $7,000 in earned income from employment for a Roth IRA owner to qualify for a $7,000 rollover. An advantageous note is that, unlike with Roth IRA contributions, there’s no upper-income limit that would exclude a high-income earner from a 529 plan–to–Roth IRA rollover.

529 plan beneficiary must be Roth IRA owner

Lastly, to qualify for a rollover, the Roth IRA owner must be the same person as the beneficiary of the 529 plan. Notably, the owner of a 529 plan can sometimes change the beneficiary of the account to another qualifying relative. Details about these rules are still being released.

The potential to roll over unused 529 funds to a Roth IRA without tax penalty represents a unique opportunity for individuals navigating both education savings and retirement planning. The nuances can be somewhat complex, and timing can be a crucial factor in the strategy’s success. Determining whether a 529 plan and subsequent rollover to Roth IRA is right for you requires research and planning. If this is something you want to consider, reach out to your advisor or contact us to talk about the pros and cons. As always, we’re here to simplify the process and help you get started.