Can a 529 Plan Be Rolled Into an IRA?

A 529 plan serves as a tax-advantaged savings vehicle specifically designed for educational expenses. Funds within these plans grow tax-free, and qualified withdrawals for higher education costs are also free from federal income tax. Individual Retirement Accounts (IRAs), on the other hand, are savings tools primarily intended for retirement, offering tax benefits for contributions, earnings, or withdrawals depending on the account type. The financial landscape for these accounts recently gained new flexibility with the passage of the SECURE Act 2.0.

This legislation, effective January 1, 2024, introduced a significant change: allowing for the rollover of unused 529 plan funds into an IRA. This provision addresses concerns for families who might have overfunded a 529 plan or whose beneficiaries chose not to pursue higher education. It provides an avenue to repurpose these educational savings for retirement without incurring typical penalties.

Conditions for Rollover Eligibility

Rolling over funds from a 529 plan to an IRA is subject to several specific conditions to ensure eligibility for tax-free treatment.

The 529 plan beneficiary must be the same individual who owns the receiving IRA.
The 529 plan must have been open for a minimum of 15 years prior to the rollover date. This rule aims to prevent using 529 plans as short-term tax shelters for retirement savings. Changing the designated beneficiary may reset this 15-year clock.
Funds being rolled over must have been contributed to the 529 plan at least five years before the rollover date. This prevents recent contributions from being immediately diverted. Only principal contributions are eligible for tax-free rollover; associated earnings are not. Rolled-over earnings would be subject to income tax and potentially a 10% penalty.
A lifetime maximum of $35,000 per beneficiary can be transferred from 529 plans to IRAs. The annual rollover amount is restricted by the annual IRA contribution limit for that year. Any amount rolled over counts towards the beneficiary’s annual IRA contribution limit, reducing other contributions. The beneficiary must also have earned income at least equal to the amount being rolled over.
Rollovers are permitted only into Roth IRAs. Income limitations for direct Roth IRA contributions are waived for these rollovers, allowing individuals with higher incomes to benefit.

Executing the Rollover

Initiating the rollover from a 529 plan to an IRA involves specific procedural steps. Contact the administrator of the 529 plan or the custodian of the IRA where the funds will be received; they will provide the necessary forms and guidance.

Most 529 plan providers will require a specific form to initiate a 529-to-IRA rollover. This form generally asks for details about the 529 account, the receiving IRA account, the desired rollover amount, and requires the signature of the 529 account owner and often the beneficiary. It is important to clearly designate the transaction as a “529-to-IRA rollover” on all documentation to ensure proper reporting and tax treatment.

The rollover must be executed as a direct trustee-to-trustee transfer. This means the funds are moved directly between the 529 plan administrator and the IRA custodian without passing through the hands of the account owner or beneficiary. Attempting an indirect rollover, where funds are first distributed to the individual and then redeposited into the IRA within 60 days, would be considered a non-qualified withdrawal from the 529 plan. Such a non-qualified withdrawal would result in the earnings portion being subject to income tax and potentially a 10% penalty.

After submitting the required forms, keep detailed records of all correspondence and transaction confirmations, including copies of rollover request forms and statements from both the 529 plan and the IRA. The timeline for completing a rollover can vary, generally taking several business days to a few weeks.

Understanding the Tax Implications

A qualified rollover from a 529 plan to a Roth IRA, adhering to all the specified conditions, is treated as a tax-free and penalty-free transaction at the federal level. This means that neither federal income tax nor the 10% penalty for non-qualified withdrawals will apply to the rolled-over amount. This provides a significant benefit for individuals repurposing unused education savings for retirement.

However, the amount rolled over directly impacts the beneficiary’s annual IRA contribution limit for the year the rollover occurs. The rolled-over funds count towards this limit, reducing the amount the individual can contribute through regular means to any IRA for that year. For instance, if the annual Roth IRA contribution limit is $7,000 and $5,000 is rolled over from a 529 plan, the beneficiary can only make an additional $2,000 in regular IRA contributions for that year. The beneficiary must also have earned income at least equal to the total amount contributed to their IRA, including the rollover amount.

If any part of the rollover does not meet the eligibility criteria, such as rolling over funds contributed less than five years prior or exceeding the lifetime or annual limits, that portion may become taxable. Any earnings included in an ineligible rollover would be subject to ordinary income tax. Additionally, a 10% federal penalty tax may apply to the earnings portion of such a non-qualified distribution.

For tax reporting purposes, the 529 plan administrator will issue Form 1099-Q, “Payments from Qualified Education Programs (Under Sections 529 and 530),” to the beneficiary. The IRA custodian will then issue Form 5498, “IRA Contribution Information,” which reports contributions made to the IRA, including the rollover amount. It is crucial that the rollover amount is reported correctly on Form 5498 as a Roth IRA contribution, typically in Box 10, rather than a traditional rollover contribution in Box 2.

While these forms are sent to the IRS, the beneficiary generally does not need to attach them to their personal tax return. However, they should retain these documents for their records to substantiate the tax-free nature of the rollover if questioned. For Roth IRAs, the rolled-over funds establish a basis, meaning they represent amounts that have already been taxed or are tax-free, and will not be taxed again upon qualified withdrawal in retirement.