Can You Roll a 529 Plan Into an IRA?

A 529 college savings plan is a tax-advantaged investment account designed to help families save for education expenses, allowing money to grow tax-free and withdrawals to be tax-free when used for qualified educational purposes. An Individual Retirement Account (IRA) offers a tax-advantaged way for individuals to save for retirement, with various types providing either tax-deferred growth or tax-free withdrawals in retirement. Previously, any unused funds in a 529 plan that were not used for qualified education expenses could be subject to income taxes and a 10% federal tax penalty on the earnings portion. However, the SECURE 2.0 Act introduced a provision allowing for tax-free and penalty-free rollovers from 529 plans to Roth IRAs under specific conditions, providing a valuable option for managing leftover education savings.

Eligibility Requirements for Rollovers

To qualify for a tax-free rollover from a 529 plan to a Roth IRA, the 529 account designated for the beneficiary must have been established and maintained for at least 15 years prior to the date of the rollover. This 15-year period generally begins when the first contribution was made to any 529 account for that beneficiary. Changing the designated beneficiary of the 529 plan may reset this 15-year clock.

Any contributions made to the 529 plan within the last five years, along with their associated earnings, are not eligible for the rollover. Essentially, the amount eligible for rollover cannot exceed the balance of the account from five years prior to the distribution date. This provision aims to prevent recent contributions from being immediately diverted from education savings to retirement savings.

The individual receiving the rollover must be the same person as the designated beneficiary of the 529 plan. Additionally, the Roth IRA account holder must have earned income at least equal to the amount being rolled over in the year the rollover occurs.

While the rollover amount counts towards the annual Roth IRA contribution limit, the typical Roth IRA income limitations do not apply to these specific rollovers. This means that beneficiaries with higher incomes, who might otherwise be ineligible to contribute directly to a Roth IRA due to income thresholds, can still benefit from this rollover provision.

Executing the Rollover Process

Initiating a rollover from a 529 plan to a Roth IRA involves contacting both your 529 plan administrator and the custodian of your Roth IRA. These institutions will provide specific instructions and any necessary forms to facilitate the transfer. Most 529 plan providers will have a dedicated form for direct rollovers to a Roth IRA, which typically requires details about the 529 account, the Roth IRA, and the desired rollover amount.

The rollover must generally be executed as a direct trustee-to-trustee transfer to maintain its tax-free and penalty-free status. An indirect rollover, where funds are first sent to the beneficiary, would likely be treated as a non-qualified distribution and subject to taxes and penalties.

Both the 529 plan provider and the Roth IRA custodian will need to exchange specific information. This typically includes the beneficiary’s details, account numbers for both the 529 plan and the Roth IRA, and the exact amount to be rolled over. Maintaining clear communication with both institutions throughout the process is important, as is keeping thorough records of all correspondence and transactions. This documentation can be helpful for tax reporting purposes and for tracking the rollover.

After submitting the required forms and information, the processing time for a rollover can vary, often taking several weeks. Follow up with both financial institutions to confirm transfer completion. The 529 plan provider will typically issue a Form 1099-Q for the distribution, and the Roth IRA custodian will report the rollover as a contribution on Form 5498.

Important Considerations and Limitations

There is a lifetime aggregate limit of $35,000 that can be rolled over from a 529 plan to a Roth IRA for a single beneficiary. This lifetime cap is not indexed for inflation.

In addition to the lifetime limit, any amount rolled over in a given year counts towards the beneficiary’s annual Roth IRA contribution limit for that year. For 2025, the annual Roth IRA contribution limit is $7,000 for individuals under age 50, and $8,000 for those age 50 and older. For example, rolling over the maximum $35,000 lifetime limit would require spreading the transfers over several years.

Qualified rollovers from a 529 plan to a Roth IRA are tax-free and penalty-free. Failure to adhere to these rules could result in the rollover being treated as a non-qualified distribution, potentially incurring income taxes and a 10% penalty on the earnings portion. This provision offers a valuable avenue for individuals with excess 529 funds to repurpose those savings for retirement.

This flexibility allows families to avoid potential penalties on unused education funds, while also giving beneficiaries a head start on retirement savings.