529 to Roth Transfers

From Bob Jennings at TaxSpeaker. Check out more at taxspeaker.com

In December 2022, SECURE Act 2.0 was signed into law to enhance retirement savings opportunities for Americans. One provision, effective in 2024, introduces new 529 plan rules, allowing owners of a 529 plan to move unused funds in the account directly to the plan beneficiary’s Roth IRA without tax or penalty.

This option may provide beneficiaries with tax-free retirement money in the Roth. Previously, if beneficiaries were to use assets in a 529 plan for anything other than qualified educational expenses, the earnings portion of any nonqualified distribution would likely be subject to ordinary income taxes and a 10% penalty.

The 529 plan must have been maintained for a minimum of 15 years to be eligible for transfer. Further, contributions made to the 529 plan in the 5 years before the start of distributions, including the associated earnings, are ineligible for a tax-free rollover. 

Funds from the 529 plan must be moved directly to a Roth IRA of the 529 plan beneficiary.

The 529 transfer is subject to a lifetime maximum of $35,000 from a 529 plan account to a Roth IRA.

Roth IRA contribution limits still apply. For 2026, those limits are $7,500 per year if the beneficiary is under age 50 and $8,600 per year for those age 50 and over. These limits are subject to change every year.

Roth IRA income limits don’t apply but earned income requirements do. The Roth IRA income thresholds will not apply to these contributions; however, the beneficiary will need to have earned income equal to or more than the contribution to move 529 plan funds into the Roth.

If a taxpayer created a 529 plan for a loved one and have excess funds in the account, he or she could technically change the beneficiary to himself or herself, but based on the language in SECURE Act 2.0, this may likely reset the 15-year clock. This means the taxpayer would need to wait 15 years before he or she could transfer any 529 plan funds into a Roth IRA.  

Advantages of 529 to Roth Transfers: 

•  A Roth has income restrictions on the ability to make deposits, whereas a 529 plan has no such restrictions; thus, even in high income years an individual may contribute to his or her own 529 plan

•  A 529 plan withdrawal is only exempt from tax and penalty to the extent used for education. A Roth withdrawal is exempt from all tax once the 5 year/ age 59 ½ rule is met without regards to the use of the funds.

•  Section 529 accounts have a negative effect on student financial aid; Roth accounts do not.

Five main rules must be met to accomplish the 529 to Roth transfer:

1. The maximum rollover per year is limited to the annual Roth contribution limit for that year (reduced by other IRA contributions) and can be increased by the over age 49 catch-up if the beneficiary is over age 49 at year end.

2. The individual doing the transfer must have earned income of at least the amount transferred.

3. The maximum lifetime transfer is $35,000 (which may include interest) per beneficiary.

4. The Roth beneficiary must be the same as the 529 beneficiary.

5. The 529 plan must have been in existence for at least 15 years as of the distribution date and in the Roth account for at least 5 years.

We are awaiting regulations from the IRS, but it appears that changing the beneficiary of a 529 plan would also restart the 15-year holding period. All transfers must be trustee-to-trustee. For qualified transfers to a Roth IRA from a 529 plan that meet the above requirements, enter the rollover amount on Form 5498, Box 10, Roth IRA Contributions.