529 Rollover Rules IRS: What You Need to Know for Tax Compliance
Understand IRS rules for 529 rollovers, including eligibility, tax implications, and reporting requirements to ensure compliance and avoid penalties.
A 529 plan is a tax-advantaged savings account designed to help families save for education expenses. While primarily used for tuition and other qualified costs, there may be times when funds need to be moved elsewhere. The IRS has specific rules governing rollovers from 529 plans, affecting taxes and potential penalties if not handled correctly.
Understanding rollover rules, eligible transfer options, and applicable limitations ensures compliance and prevents unnecessary costs.
Rollover Eligibility Criteria
Moving funds from a 529 plan is subject to IRS conditions to ensure transfers align with the plan’s intended purpose. Rollovers must be completed within 60 days of withdrawal to avoid taxes and penalties. Missing this deadline results in a non-qualified withdrawal, making earnings subject to income tax and a 10% penalty.
Rollovers can only be made to another 529 plan for the same beneficiary or a qualifying family member, which includes siblings, parents, children, and first cousins. This allows families to reallocate unused funds without tax consequences, provided the new account remains within the 529 structure. However, rollovers between different state-sponsored plans are limited to once per 12-month period per beneficiary. Exceeding this limit results in a taxable distribution.
If changing the beneficiary, the new beneficiary must be a qualifying family member to maintain tax-free status. Transfers to someone outside this category are treated as non-qualified withdrawals, with earnings subject to income tax and penalties. These rules prevent 529 plans from being used as general savings accounts rather than for education.
Transfers to Roth IRAs
Recent tax law changes introduced a new option: rolling over unused 529 funds into a Roth IRA. The SECURE 2.0 Act of 2022 allows this transfer without penalties or taxes, but specific conditions must be met.
Transfers of Excess Funds
A 529-to-Roth IRA rollover is intended for individuals with leftover education savings. The 529 account must have been open for at least 15 years, preventing people from opening new accounts solely to take advantage of the tax-free transfer. Contributions and earnings from the last five years cannot be included in the rollover, meaning only older funds qualify.
For example, if a 529 plan was opened in 2010 and received contributions in 2018, 2019, and 2020, only funds contributed before 2018, along with their earnings, would be eligible for transfer. This ensures the account was used for long-term education savings rather than as a backdoor retirement contribution strategy.
Income Considerations
The beneficiary must have earned income in the year of the rollover. The amount transferred cannot exceed their taxable compensation for that year. If the beneficiary earns $4,000 from a part-time job, the maximum rollover amount is $4,000, even if more funds are available in the 529 plan.
The rollover is also subject to the annual Roth IRA contribution limit, which is $7,000 for individuals under 50 in 2024. This limit includes all Roth IRA contributions. If the beneficiary has already contributed $3,000 to their Roth IRA, they can only roll over up to $4,000 from the 529 plan.
Maximum Rollover Amounts
The total lifetime amount that can be rolled over from a 529 plan to a Roth IRA is capped at $35,000 per beneficiary. This cap applies regardless of how many years the rollovers take place. If a beneficiary rolls over $7,000 per year for five years, they reach the $35,000 limit and cannot transfer additional funds.
The rollover must be made directly from the 529 plan to the Roth IRA of the same beneficiary. The account owner cannot transfer funds to their own Roth IRA unless they are also the beneficiary of the 529 plan. This prevents misuse for estate planning or tax avoidance.
Transfers to ABLE Programs
For families saving for a beneficiary with disabilities, transferring funds from a 529 plan to an ABLE account provides flexibility while maintaining tax advantages. ABLE (Achieving a Better Life Experience) accounts allow individuals with disabilities to save for qualified expenses without affecting eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. Since the Tax Cuts and Jobs Act of 2017, 529 funds can be rolled over into ABLE accounts.
ABLE accounts cover a broader range of expenses beyond education, including housing, transportation, healthcare, and assistive technology. This makes them useful for individuals with disability-related costs beyond tuition. However, the IRS imposes an annual contribution limit on ABLE accounts—$18,000 in 2024—which includes both new contributions and rollovers from a 529 plan. Exceeding this limit results in income tax and a 6% excise penalty.
Only the beneficiary of the 529 plan or a qualifying family member who meets the Social Security Administration’s definition of disability can own the receiving ABLE account. The beneficiary must have acquired their disability before age 26, though this threshold will increase to age 46 starting in 2026 under the ABLE Age Adjustment Act.
Tax Reporting Requirements
When rolling over funds from a 529 plan, accurate tax reporting is necessary. While qualified rollovers are not subject to federal income tax, they must be properly documented. The financial institution managing the 529 plan will issue Form 1099-Q to the account owner or beneficiary, detailing the amount distributed. If the transfer follows IRS guidelines, it will not be classified as taxable income, but taxpayers must ensure the transaction is correctly reflected on their return.
The reporting process varies depending on the destination of the rollover. When moving funds to another 529 plan, the new plan administrator should issue a confirmation of receipt, but taxpayers must retain records proving the transfer occurred within the allowed timeframe. For rollovers to an ABLE account, documentation should include proof that the receiving account belongs to an eligible individual and that total contributions for the year did not exceed the IRS limit. If funds are moved to a Roth IRA, taxpayers must track amounts to ensure they stay within lifetime and annual rollover limits.
Avoiding Penalties
Failing to follow IRS rules when rolling over 529 plan funds can result in unexpected taxes and penalties. The most common mistake is missing the 60-day rollover window, which causes the distribution to be treated as non-qualified. This means earnings on the withdrawn amount become subject to federal income tax, and an additional 10% penalty applies. To avoid this, funds should be transferred directly between financial institutions whenever possible, eliminating the risk of missing the deadline.
Another issue arises when exceeding rollover limits. Since 529-to-529 rollovers are restricted to once per 12-month period per beneficiary, making multiple transfers within a year can trigger taxable distributions. Similarly, rolling over more than the permitted amount into a Roth IRA or ABLE account can result in penalties. Keeping detailed records of previous rollovers and ensuring compliance with contribution limits helps prevent costly mistakes.
Document Retention
Maintaining thorough documentation is essential for proving compliance with IRS regulations. Since 529 plan rollovers must meet specific conditions to remain tax-free, keeping records of all transactions ensures taxpayers can substantiate their claims if audited. This includes account statements showing the original withdrawal, confirmation of deposit into the new account, and any correspondence from financial institutions verifying the transfer.
For rollovers to Roth IRAs or ABLE accounts, additional documentation may be necessary. Taxpayers should retain proof of the 529 plan’s age to confirm eligibility for a Roth IRA transfer, as well as records of the beneficiary’s earned income to demonstrate compliance with contribution limits. In the case of ABLE accounts, maintaining evidence of the beneficiary’s disability status and annual contribution totals ensures transfers do not exceed allowable thresholds. Proper record-keeping minimizes the risk of disputes with the IRS and provides peace of mind in case of future inquiries.