Can I Convert a 529 Plan to a Roth IRA?

The ability to transfer funds from a 529 college savings plan to a Roth Individual Retirement Account (IRA) represents a significant development for individuals managing education and retirement savings. Enacted through the SECURE 2.0 Act, this provision offers flexibility for families with excess 529 funds. Effective January 1, 2024, it allows repurposing unused educational savings for retirement, potentially avoiding prior penalties.

Understanding 529 Plans and Roth IRAs

Section 529 plans are state-sponsored investment vehicles designed to help families save for qualified education expenses. Contributions to these plans are typically made with after-tax dollars, but the funds grow tax-free and qualified withdrawals for higher education costs are also tax-free at the federal level. Before the recent legislative change, any withdrawals not used for qualified educational expenses were subject to federal income tax on the earnings portion, plus a 10% federal penalty tax.

Conversely, Roth IRAs serve as retirement savings accounts funded with after-tax contributions. A primary benefit of a Roth IRA is that qualified withdrawals in retirement are entirely tax-free, including both contributions and earnings. For 2024, individuals under age 50 can generally contribute up to $7,000 to a Roth IRA, while those age 50 and older can contribute up to $8,000. Eligibility to contribute directly to a Roth IRA is typically subject to income limitations, though these limits are waived for the specific 529 rollover provision.

Key Requirements for 529 to Roth IRA Rollovers

The SECURE 2.0 Act introduced specific conditions that must be met for a tax-free and penalty-free rollover from a 529 plan to a Roth IRA. These rules ensure the provision is used for long-term savings.

The 529 account must have been open for at least 15 years. This period is measured from the first contribution date for the designated beneficiary. A change in beneficiary may restart this 15-year clock.

The Roth IRA receiving the funds must be established in the name of the same individual who is the designated beneficiary of the 529 plan. Additionally, only funds that have been held in the 529 account for at least five years before the rollover date are eligible for transfer. This means any contributions made to the 529 plan, along with their associated earnings, within the last five years are not eligible for immediate rollover to a Roth IRA.

Rollovers are subject to annual and lifetime limits. The amount rolled over in any given year cannot exceed the annual Roth IRA contribution limit for that year, which is $7,000 for individuals under age 50 in 2024, and $8,000 for those 50 and older. This rollover amount counts towards the beneficiary’s overall annual Roth IRA contribution limit from all sources. Furthermore, a lifetime maximum of $35,000 can be rolled over from 529 plans to Roth IRAs for a single beneficiary. The beneficiary must also have earned income at least equal to the amount being rolled over in that year.

The Rollover Process and Reporting

Initiating a rollover from a 529 plan to a Roth IRA typically involves coordinating with both the 529 plan administrator and the Roth IRA custodian. The transfer must occur as a direct, trustee-to-trustee rollover. Funds are transferred directly between financial institutions, ensuring the rollover remains tax-free and penalty-free.

The 529 plan administrator will likely require specific forms or instructions from the account holder to process the rollover, and they will verify eligibility. It is important for the account holder to maintain thorough records of the transaction, including all communications, transfer confirmations, and statements from both the 529 plan and the Roth IRA custodian.

For tax reporting purposes, the 529 plan administrator will issue Form 1099-Q, “Payments from Qualified Education Programs,” which will report the distribution from the 529 plan. The Roth IRA custodian will then issue Form 5498-IRA, “IRA Contribution Information,” to report the contribution to the Roth IRA. Specifically, the rollover amount is generally entered in Box 10 of Form 5498, which is typically used for Roth IRA contributions. While these qualified rollovers are tax-free and penalty-free, they must still be properly reported on the individual’s federal income tax return according to IRS guidelines.