Can a 529 Be Rolled Into an IRA? The New Rules

A 529 plan is a specialized savings vehicle designed primarily to help individuals save for qualified education expenses. These plans offer tax advantages, allowing contributions to grow tax-free and qualified withdrawals to be free from federal income tax. They provide a structured approach to funding future educational pursuits, from kindergarten through college and even vocational training.

Conversely, Individual Retirement Arrangements (IRAs) serve as foundational tools for retirement savings. Traditional IRAs may offer tax-deductible contributions, with earnings growing tax-deferred until withdrawal in retirement. Roth IRAs, funded with after-tax contributions, allow earnings to grow tax-free and qualified withdrawals in retirement to also be tax-free. Both account types encourage long-term financial planning for distinct life stages.

Eligibility for Rollover

A significant development in financial planning now allows for the transfer of unused funds from a 529 education savings plan into a Roth Individual Retirement Arrangement (IRA). This provision, enacted through Section 126 of the SECURE 2.0 Act, became effective on January 1, 2024, offering a new avenue for managing education savings that exceed a beneficiary’s needs. This option aims to provide flexibility for account owners concerned about potential penalties on leftover 529 funds.

To qualify for this tax-free and penalty-free rollover, several specific conditions must be met. The 529 plan from which the funds are being transferred must have been open for at least 15 years.

The rollover must be directed to a Roth IRA established for the same beneficiary as the 529 plan. The rollover provision does not permit transfers to an IRA for a different individual, such as a sibling, if they were not the original 529 beneficiary.

There is a lifetime aggregate limit on the amount that can be rolled over from 529 plans to a Roth IRA for any single beneficiary. This limit is set at $35,000.

Each annual rollover amount is also subject to the prevailing IRA annual contribution limits. For the tax year 2025, this limit is $7,000, or $8,000 for individuals aged 50 or older. Any amount rolled over from the 529 plan will count towards this annual limit, reducing the amount the beneficiary can otherwise contribute to their IRA from earned income for that year.

Additionally, the funds being rolled over must have been in the 529 account for a specified period. Any contributions made to the 529 plan, along with their associated earnings, within the last five years are generally not eligible for rollover. This rule ensures that only long-held funds that truly represent excess education savings are transferred, preventing recent contributions from being immediately redirected to retirement savings.

A further requirement is that the Roth IRA beneficiary must have earned income at least equal to the amount being rolled over in the year of the transfer. This aligns with standard IRA contribution rules, which generally require contributions to be supported by earned income. However, a notable exception for these rollovers is that the usual Roth IRA income limitations, which restrict direct contributions for high-income earners, do not apply.

Understanding the Rollover Process

Initiating a qualified rollover from a 529 plan to a Roth IRA involves a series of practical steps, primarily focusing on direct communication between financial institutions. The process typically begins by contacting the administrator of the 529 plan. This initial outreach allows the account owner to understand the specific procedures and documentation required by their particular 529 plan provider.

The paramount requirement for a tax-free rollover is that the transfer must be executed as a direct trustee-to-trustee transfer. Avoiding a direct distribution to the individual helps ensure the transfer maintains its tax-advantaged status.

Both the 529 plan administrator and the Roth IRA custodian will likely require specific forms and documentation to facilitate the transfer. The account owner will need to accurately provide details such as the 529 account information, the Roth IRA account number, and the precise amount intended for rollover.

Clear and consistent communication between the two financial institutions is important throughout this process. The 529 plan administrator will typically coordinate directly with the Roth IRA custodian to ensure the seamless and compliant transfer of funds. This direct coordination minimizes potential errors and helps verify that all regulatory requirements for the rollover are met.

Once all necessary forms are submitted and verified, the processing time for the rollover can vary. While some transfers might complete within a few business days, others could take several weeks, depending on the institutions involved and the complexity of the request. Account owners should confirm estimated timelines with both their 529 plan provider and IRA custodian to manage expectations.

Tax Considerations

A qualified rollover from a 529 plan to a Roth IRA is treated as a tax-free event at the federal level. This means that if all the specified eligibility criteria are met, the transferred amount will not be subject to federal income tax or the customary 10% federal penalty typically imposed on non-qualified 529 withdrawals.

It is important to understand that the rollover amount directly counts towards the beneficiary’s annual Roth IRA contribution limit for the year the transfer occurs. For example, if a beneficiary rolls over $5,000 from a 529 plan in 2025, and the annual IRA limit is $7,000, they can only contribute an additional $2,000 to any other IRA (traditional or Roth) from their earned income for that year. This aggregation ensures compliance with established IRA contribution ceilings.

Should a rollover fail to meet all the eligibility criteria, the distribution from the 529 plan would be considered non-qualified. In such instances, the earnings portion of the distributed amount typically becomes subject to federal income tax. Additionally, a 10% federal penalty tax generally applies to these earnings, unless a specific exception is met.

The tax implications extend beyond the rollover itself to how the funds are treated once they reside within the Roth IRA. Since the funds are in a Roth IRA, future qualified withdrawals from the account in retirement will be entirely tax-free.

Beneficiaries should recognize that while the federal tax treatment for qualified rollovers is clear, state tax rules can vary. Some states may have different interpretations or impose their own taxes or recapture provisions on such transfers. Consulting with a qualified tax professional is always advisable to understand the full tax implications based on an individual’s specific financial situation and state residency.