Can a 529 Be Converted to a Roth IRA?

A 529 plan is a tax-advantaged savings vehicle for educational expenses. A Roth Individual Retirement Account (IRA) is a retirement savings account, allowing for tax-free withdrawals in retirement under certain conditions. The SECURE 2.0 Act of 2022 introduced a new flexibility: the ability to roll over unused funds from a 529 plan into a Roth IRA. This provision allows repurposing educational savings for retirement, addressing concerns about overfunding 529 plans. This option became effective on January 1, 2024, helping beneficiaries use unused educational funds for retirement savings.

Eligibility Requirements for Conversion

Converting funds from a 529 plan to a Roth IRA requires specific conditions. The 529 account must have been established for at least 15 years prior to conversion. This ensures the original intent was for educational savings, not a backdoor Roth IRA strategy. The 529 plan beneficiary must also be the Roth IRA owner receiving the funds.

The beneficiary must have earned income at least equivalent to the amount rolled over in the year of conversion. This aligns with general Roth IRA contribution rules. Unlike standard Roth IRA contributions, these rollovers are not subject to typical income limitations. This allows individuals otherwise ineligible due to high income to use this option.

Annual and lifetime limits govern the rollover amount. The amount converted yearly cannot exceed the annual Roth IRA contribution limit for that year ($7,000 for 2025, or $8,000 for those 50 and older). This annual limit applies to all Roth IRA contributions made by the beneficiary, reducing their remaining capacity. A lifetime maximum of $35,000 can be rolled over per beneficiary.

Contributions made to the 529 plan within five years preceding the rollover date are ineligible for conversion. If a beneficiary change occurred on the 529 plan, it may restart the 15-year eligibility clock, potentially delaying a qualified rollover.

The Conversion Process

Converting eligible 529 plan funds to a Roth IRA involves specific steps, starting with contacting financial institutions. The 529 account owner communicates with their plan administrator to request the rollover. The beneficiary, also the Roth IRA account holder, coordinates with their Roth IRA custodian. This ensures both sides are prepared for the transfer.

The process requires completing specific forms from both the 529 plan administrator and the Roth IRA custodian. These forms request details like the 529 account number, Roth IRA information, and the precise rollover amount. Accurate completion is important to prevent delays. Financial institutions process the transfer based on submitted documentation.

It is recommended to execute the rollover as a direct trustee-to-trustee transfer. Funds move directly from the 529 plan provider to the Roth IRA custodian, bypassing the beneficiary. This method helps avoid potential tax withholding or other complications. Maintaining thorough records, including forms and confirmation statements, is important for future tax reporting.

Tax Considerations of 529 to Roth IRA Rollovers

When executed according to rules, a qualified rollover from a 529 plan to a Roth IRA is tax-free and penalty-free. Funds transferred are not subject to federal income tax or the typical 10% penalty for non-qualified 529 withdrawals. This allows individuals to repurpose savings without immediate tax consequences.

The amount rolled over into a Roth IRA directly impacts its annual contribution limit. Funds converted from the 529 plan count towards the beneficiary’s annual Roth IRA contribution limit for that year. For instance, if the annual limit is $7,000 and $5,000 is rolled over, the beneficiary can only contribute an additional $2,000. Exceeding this limit can result in excess contributions subject to penalties.

While qualified rollovers are tax-advantaged, deviations from rules can lead to taxable events or penalties. If the 529 plan has not been open for 15 years, or if contributions from the last five years are included, the distribution may be non-qualified. In such cases, the earnings portion could be subject to income tax and a 10% federal penalty. The lifetime rollover limit of $35,000 per beneficiary must be observed; amounts converted beyond this cap are also non-qualified.

For tax reporting, the 529 plan administrator issues Form 1099-Q to report the distribution. This form indicates a trustee-to-trustee transfer to a Roth IRA. The Roth IRA custodian provides Form 5498, reporting the rollover as a contribution. These forms are for informational purposes and do not need to be attached to a tax return if eligibility criteria are met. Once funds are in a Roth IRA, they are subject to Roth IRA distribution rules, meaning they cannot be withdrawn for qualified education expenses without potential taxes or penalties.