How Much of a 529 Can Be Converted to a Roth IRA?

The SECURE Act 2.0 allows for the tax-free and penalty-free rollover of unused 529 education savings funds into a Roth Individual Retirement Account (IRA) for the same beneficiary. Effective January 1, 2024, this option provides flexibility for families with overfunded accounts or beneficiaries who did not use all allocated funds for qualified educational expenses.

Understanding Eligibility for 529 to Roth IRA Rollovers

To qualify for a rollover from a 529 plan to a Roth IRA, specific conditions must be met. The 529 account must have been open for at least 15 years prior to the rollover. This holding period helps prevent misuse of 529 plans as a direct vehicle for retirement savings.

Contributions and their associated earnings made to the 529 plan within the five-year period immediately preceding the rollover date are ineligible for transfer. This “five-year rule” ensures only seasoned funds are moved. The Roth IRA receiving the funds must be established in the name of the same beneficiary as the 529 plan.

The transfer must occur as a direct trustee-to-trustee transaction. Funds move directly between the 529 plan administrator and the Roth IRA custodian, without passing through the beneficiary’s direct control. An indirect rollover, where funds are first withdrawn by the beneficiary, would result in a non-qualified distribution subject to taxes and penalties.

Determining the Allowable Conversion Amount

The amount convertible from a 529 plan to a Roth IRA is subject to several limitations. Each annual rollover is capped by the Roth IRA contribution limit for that year. For 2024 and 2025, this limit is $7,000 for individuals under age 50, and $8,000 for those age 50 and older. Any other contributions made directly by the beneficiary to a Roth IRA in the same year will reduce the amount available for a 529 rollover. For example, if a beneficiary contributes $2,000 to their Roth IRA, the maximum they can roll over from a 529 plan would be $5,000 (assuming a $7,000 annual limit).

Beyond the annual limits, there is a lifetime aggregate cap of $35,000 per beneficiary for rollovers from all 529 plans to Roth IRAs. The total amount transferred into their Roth IRA over their lifetime cannot exceed this $35,000 threshold. This limit applies independently of the annual Roth IRA contribution limits, meaning it will take multiple years to transfer the full $35,000.

Only contributions and their associated earnings held in the 529 account for at least five years are eligible for the tax-free rollover. Contributions made within the most recent five-year period, along with earnings from those contributions, are not eligible. The beneficiary must also have earned income at least equal to the amount being rolled over in the year of the transfer. While income limitations for Roth IRA contributions are waived, the earned income requirement remains.

Executing the Rollover Process

Initiating the transfer begins by contacting the administrator of the 529 plan. Most 529 plan providers have specific forms or procedures for requesting a direct rollover to a Roth IRA.

The 529 plan administrator will require details about the receiving Roth IRA, including the custodian’s information and the beneficiary’s Roth IRA account number. It is advisable to inform the Roth IRA custodian of the impending incoming rollover to ensure a smooth and timely transfer.

The transfer must be executed as a direct trustee-to-trustee transaction. Funds are sent directly from the 529 plan provider to the Roth IRA custodian. Funds should never be distributed to the beneficiary first, as this would constitute a non-qualified withdrawal and could trigger taxes and penalties. Processing times can vary, so confirming the expected timeline with both the 529 plan administrator and the Roth IRA custodian is recommended.

Tax Implications and Reporting Requirements

Qualified rollovers from a 529 plan to a Roth IRA are tax-free and penalty-free at the federal level. This means that if all the eligibility rules and limits, such as the 15-year account holding period, the five-year contribution rule, and the annual and lifetime caps, are meticulously followed, the transfer will not result in taxable income or a 10% penalty. This tax-advantaged treatment makes the rollover an attractive option for repurposing unused education savings.

Regarding reporting, the 529 plan administrator will issue a Form 1099-Q, “Payments from Qualified Education Programs (Under Sections 529 and 530),” to the beneficiary for the year the rollover occurs. This form reports the distribution from the 529 plan, but it is important to understand that a qualified rollover is considered a non-taxable event. The Roth IRA custodian will also report the contribution to the Roth IRA on Form 5498, “IRA Contribution Information,” for the beneficiary. These forms document the movement of funds, but the tax-free nature of a compliant rollover means no additional tax liability arises.

However, if the rollover does not meet all the specified requirements—for instance, if the 15-year rule is violated, or the amount transferred exceeds the permissible limits—the non-qualified portion of the distribution could become subject to taxation. The earnings portion of such a non-qualified distribution would be subject to ordinary income tax, and a 10% federal penalty tax may also apply. Given the complexities involved and the potential for adverse tax consequences if rules are not precisely followed, consulting with a qualified tax professional is advisable to ensure compliance with all federal and any applicable state tax regulations.