What to Know About Rolling a 529 Account Into a Roth IRA

It used to be that there were only two options for what to do with unused funds from a 529 college savings plan: withdraw the money or save it for future qualified education expenses.

As of 2024, however, you can now also roll over unspent funds from a 529 plan to a beneficiary-owned Roth Individual Retirement Account (IRA). This provision, introduced as part of the SECURE 2.0 Act, gives families a way to kick-start a young person’s retirement savings.

While this change to the tax law enhanced the flexibility of 529 plan accounts, there are qualifications and limitations about how, when, and how much money can be transferred from a 529 to a Roth. Sections of the law that remain unclear could be the subject of future guidance from policymakers.

Rollover Rule Solves a Long-Standing 529 Issue

Since they were introduced in the 1990s, 529 plans, named after Section 529 of the Internal Revenue Code and designed to help people save for education costs, have grown more adaptable. Changes to 529s in the past few years have made it possible to pay for a child’s private primary and secondary school tuition expenses and to repay student loans using 529 funds.

These enhancements, combined with tax-free withdrawals for qualifying expenses and generous contribution maximums, have made 529 plans a popular way to finance a child’s or grandchild’s education.

But one issue continued to vex account owners: What happens to the money in a 529 account if the beneficiary doesn’t use all the funds?

This might occur, for example, if the beneficiary attended a college where tuition was cheaper than expected, decided not to attend, dropped out, or received a scholarship or an inheritance.

Prior to 2024, there were options for what to do with leftover 529 funds, but they were rather restrictive. Generally, an account owner could:

• Keep the funds invested for the beneficiary’s future educational use (since there are no time limits on when they must be used);
• Change the beneficiary to another member of the family (including relatives of the original beneficiary and the account owner themself); or
• Withdraw funds for noneducation expenses, such as a home remodeling project or a big purchase (subject to income taxes and a 10 percent penalty).

With maximum contribution limits for 529 plans up to or exceeding $500,000 in many states, college enrollment trending downward, and more students dropping out of college, some 529 owners found themselves with a significant chunk of available change and limited ways to spend it.

But thanks to the SECURE 2.0 Act, there is now another way to utilize these funds that has nothing to do with education (or home improvement) and makes 529 plans even more flexible.

Conditions for Rolling Over a 529 to a Roth IRA

The SECURE Act 2.0 provision allowing rollovers from a 529 plan to a Roth IRA gives account owners a fourth option for what to do with their excess savings. This option can be exercised without tax penalties, provided certain conditions are met. Here are some of the key details:

• Annual Limit: The rollover counts toward the annual Roth IRA contribution limit set by the IRS. In 2024 and 2025, that limit is $7,000. Note that this annual contribution limit is the beneficiary’s, not the parent’s or grandparent’s (individuals 50 and older can contribute $8,000 in 2024 and 2025).
• Lifetime Limit: The maximum amount that can be rolled over from a 529 plan to a Roth IRA is $35,000 per beneficiary over their lifetime.
• 529 Plan Age: The 529 account must have been opened in the beneficiary’s name for at least 15 years to be eligible for a rollover.
• Contribution Age: Contributions made to the 529 plan within the past five years (including earnings on those contributions) cannot be rolled over.
• Beneficiary Earned Income: Similar to the standard earned income rules for Roth IRA contributions, the 529 plan beneficiary must have taxable income in the year of the rollover that is at least equal to the amount rolled over. For example, if the account owner plans on rolling over $5,000 in 2024, the beneficiary must have earned $5,000 or more for the year.

Although they have limits, these new rules give families a way to save for a child’s or grandchild’s education and their retirement at the same time, without worrying about them not attending college or not spending all the money in the account. They also create new possibilities for using a Roth IRA as an estate planning tool.

How to Move Unused 529 Plan Funds to a Roth IRA

Anyone looking to capitalize on the 529 to Roth rollover option should take the following steps:

1. Contact the financial institution that holds your 529 plan to make sure the plan and the beneficiary qualify for a rollover.
    
2. Open a Roth IRA in the name of the 529 plan beneficiary (if they don’t already have one). The same financial institution that holds your 529 plan may also offer Roth IRAs.
    
3. Set up the asset transfer. To avoid taxes and penalties, the transfer should be made directly from the 529 to the Roth IRA. Check with the 529 plan provider to receive guidance on how to do this.
    
4. Make annual contributions to the IRA until $35,000 has been rolled over from the 529 plan.

Keep in mind that an IRA can be funded with various types of investments, such as stocks, bonds, and mutual funds. A younger investor might benefit more from higher-risk, higher-growth investments since they have a longer investment horizon prior to retirement. An advisor can explain different IRA investment options with you.

Questions Remain About 529 to Roth IRA Rollovers

Most 529 plans have started processing rollover requests, but questions remain about the new rule, which the IRS may address in the future. These gray areas in the statute are subject to various interpretations and, from a planning perspective, could affect the tax treatment of 529-to-Roth rollovers and the best way to take advantage of this option.

The main takeaway for now is that parents and grandparents can make a tax-free contribution that goes toward either education or retirement savings. Regardless of how the money ends up being spent, you can feel good knowing you’re increasing opportunities for the next generation.

To discuss specific 529-to-Roth rollover planning strategies, potential tax consequences, and how the process could benefit your heirs, consult with your estate planning attorney.