Can You Rollover a 529 to a Roth IRA?

A new provision effective January 1, 2024, allows for the rollover of funds from a 529 college savings plan into a Roth Individual Retirement Account (IRA). Historically, 529 plans served as tax-advantaged vehicles primarily for educational expenses, offering tax-free growth on investments when used for qualified higher education costs. Roth IRAs, conversely, are designed for retirement savings, providing tax-free growth and tax-free withdrawals in retirement, assuming certain conditions are met. This new provision creates a pathway to repurpose unused education savings for long-term retirement goals, bridging the gap between these two distinct savings vehicles.

Qualifying for a 529 to Roth IRA Rollover

Initiating a rollover from a 529 plan to a Roth IRA requires specific eligibility criteria. The 529 account must have been established and maintained for at least 15 years prior to the rollover date. Additionally, any contributions, along with their associated earnings, that are intended for rollover must have been held within the 529 account for at least five years. This “seasoning” rule prevents recent contributions from being immediately diverted to a retirement account.

The beneficiary of the 529 plan must also be the named account holder of the Roth IRA receiving the funds. While Roth IRA contributions typically have income limitations, these income restrictions are waived specifically for 529-to-Roth IRA rollovers. However, the beneficiary must still have earned income in the year of the rollover that is at least equal to the amount being rolled over.

There are also strict limits on the amounts that can be rolled over. A lifetime maximum of $35,000 per beneficiary applies to all rollovers from 529 plans to Roth IRAs. This cap is cumulative across all 529 accounts held for that beneficiary. Furthermore, the annual rollover amount is restricted by the Roth IRA contribution limit for the year the rollover occurs. For instance, in 2024 and 2025, the Roth IRA contribution limit is $7,000 for individuals under age 50, and $8,000 for those age 50 and older. Any other contributions made to any Roth IRA for that beneficiary in the same year will reduce the available annual rollover amount from the 529 plan.

Steps for Initiating the Rollover

Executing a rollover from a 529 plan to a Roth IRA involves procedural actions between financial institutions. The primary step is to contact both the administrator of the 529 plan and the custodian of the Roth IRA to initiate the transfer. Each institution will have specific forms and requirements for processing the rollover, which must be completed accurately. For example, the 529 plan administrator will likely require a distribution request form, while the Roth IRA custodian will need a rollover contribution form.

The transfer must occur as a direct rollover, meaning the funds are sent directly from the 529 plan administrator to the Roth IRA custodian. This “trustee-to-trustee” transfer helps maintain the tax-free and penalty-free status of the rollover. An indirect rollover, where funds are distributed to the beneficiary first and then re-deposited into the Roth IRA within 60 days, is typically not permitted for these specific 529 to Roth IRA transfers.

After the rollover is initiated, confirm its completion by verifying that the funds have been successfully deposited into the Roth IRA account and obtaining confirmation statements from both institutions. For tax reporting purposes, the 529 plan administrator will issue Form 1099-Q, “Distributions from Qualified Education Programs.” The Roth IRA custodian will also issue Form 5498, “IRA Contribution Information.” These forms are informational and generally do not need to be submitted with a tax return, but they should be retained for personal records.

Tax Treatment of Rolled Over Funds

A qualified rollover from a 529 plan to a Roth IRA is generally considered a tax-free and penalty-free transaction at the federal level, provided all the stipulated conditions are met. This means that neither the amount rolled over nor any associated earnings within the 529 plan are subject to federal income tax or the typical 10% penalty for non-qualified withdrawals.

Once the funds are successfully rolled into a Roth IRA, they become subject to Roth IRA distribution rules. A “qualified distribution” from a Roth IRA is typically tax-free and penalty-free. To be considered qualified, the distribution must occur after a five-year holding period, known as the “five-year seasoning rule,” and after the Roth IRA owner reaches age 59½, becomes disabled, uses the funds for a first-time home purchase (up to a lifetime limit of $10,000), or upon death. If earnings are withdrawn from the Roth IRA prior to meeting these qualified distribution conditions, they may be subject to ordinary income tax and a 10% early withdrawal penalty.

The amount rolled over from the 529 plan counts towards the beneficiary’s annual Roth IRA contribution limit for the year in which the rollover occurs. For example, if an individual rolls over $7,000 from a 529 plan in 2025, they cannot make any additional direct Roth IRA contributions for that year. However, the rolled-over amount does not impact the beneficiary’s ability to contribute to a Roth IRA in subsequent years, as it is a one-time accounting against the annual limit for the year of transfer.