Understanding 529 Plan to Roth IRA Rollovers

Effective in January 2024, SECURE 2.0 Act allows unused funds from a 529 college savings account to be rolled over directly to a Roth IRA. This recent legislative change may address concerns when a beneficiary may decide not to go to college, or when their need for this money has changed. The industry is seeking IRS clarification on some of the specifics of the change, but there are certain general requirements. Please note that not every state may consider the 529 to Roth IRA rollover to be qualified for state income tax purposes. Consult a tax professional regarding the applicability of these rollovers to your personal situation.

• The 529 plan must be open for 15 or more years.
• The beneficiary of the 529 account and the owner of the Roth IRA must be the same person.
• Contributions and associated earnings must have been in the 529 plan account for at least 5 years in order to qualify for a rollover to a Roth IRA. Contributions and associated earnings made within the last 5 years are ineligible.
• A lifetime maximum of $35,000 per beneficiary can be rolled over from a 529 plan to a Roth IRA, subject to applicable Roth IRA contribution limits.
• The 529 to Roth IRA rollover is subject to the IRA annual contribution limit for the taxable year applicable to the beneficiary for all individual retirement plans maintained for the benefit of the beneficiary. Thus, the total amount that can be rolled over from a 529 plan to a Roth IRA annually is the annual IRA contribution limit for the year, reduced by the total of any other IRA contributions made by the beneficiary in that year.
• The beneficiary must have earned income sufficient to make the contribution into the Roth IRA.

It’s also important to note that income limitations on Roth IRA contributions do not apply to these rollovers. The rollover from a 529 to a Roth is a nontaxable distribution.

This new law may help to alleviate concerns about overfunding a 529 college savings account because it may provide an option to reposition the unused funds to a tax-advantaged Roth IRA.