Rules for a 529 to Roth IRA Rollover

A provision within the SECURE 2.0 Act, enacted in 2022, introduced a change for college savings plans. Effective January 1, 2024, individuals can move funds from a 529 education savings plan to a Roth Individual Retirement Account (IRA) without incurring federal taxes or penalties. This created a new avenue for unused or excess 529 funds, providing flexibility for families who may have overfunded an account or whose beneficiary received scholarships or chose not to pursue higher education.

Eligibility Requirements for the Rollover

For a rollover from a 529 plan to a Roth IRA to be permitted, several conditions must be met. The primary requirement is that the 529 account must have been open for a minimum of 15 years before the transfer can occur. The clock for this 15-year period starts from the date the account was first established and funded. Changing the designated beneficiary on the 529 plan will stop and reset this 15-year holding period. An exception exists if funds are rolled over to a new 529 plan for the same beneficiary or for a qualifying family member, in which case the holding period of the original account is retained.

Another condition centers on the recipient of the funds. The rollover must be made to a Roth IRA that is owned by the same individual who is the designated beneficiary of the 529 plan. There is no specific age requirement for the beneficiary to qualify for the rollover.

A financial stipulation involves a five-year look-back period for contributions. Any contributions, and the earnings on those contributions, made to the 529 plan within the five-year window ending on the date of the rollover are ineligible for the transfer. For example, if a rollover is initiated on July 1, 2027, any money deposited into the account after July 1, 2022, cannot be included in the rollover amount. This rule prevents individuals from using the 529 plan as a short-term pass-through to fund a Roth IRA, ensuring the funds were genuinely intended for education for a substantial period.

The beneficiary must also have earned income at least equal to the amount being rolled over for that specific tax year. However, a notable feature of this specific rollover is that the standard income limitations that can prevent high-earners from making direct Roth IRA contributions are waived. This allows a qualifying rollover to proceed regardless of the beneficiary’s income level for the year.

Understanding the Rollover Limits

A lifetime maximum of $35,000 per beneficiary is permitted for these types of rollovers. This amount is not indexed for inflation, meaning it will not automatically increase over time unless new legislation is passed.

In addition to the lifetime cap, there is an annual restriction on the rollover amount. The sum moved in any single year cannot exceed the annual Roth IRA contribution limit for that year. For 2025, the standard contribution limit is $7,000 for individuals under age 50 and $8,000 for those 50 and older. Therefore, a beneficiary cannot transfer the entire $35,000 in one year but must spread it out over several years, adhering to the contribution limit of each respective year.

The rollover amount counts toward the annual contribution limit. For instance, if the annual limit is $7,000 and the beneficiary executes a $4,000 rollover from a 529 plan, they are only permitted to contribute an additional $3,000 of their own money to their Roth IRA for that year. If they roll over the full $7,000, their ability to make regular contributions for that year is reduced to zero.

Information and Decisions Prior to the Rollover

You will need the 529 plan account number and the contact information for the plan administrator who will process the request. You must also have the account number for the beneficiary’s Roth IRA and the details of the financial institution that holds it. A calculation of the eligible funds, considering the five-year rule for recent contributions, is also necessary to determine the maximum transferable amount.

The beneficiary must have an established Roth IRA to receive the funds. If one does not already exist, it must be opened before the rollover process can begin.

With the necessary information collected, you must decide on the precise dollar amount to roll over for the current year. If a new Roth IRA is being opened, a decision must be made regarding which financial institution to use, considering factors like investment options, fees, and customer service.

The Rollover Process

The first action is to contact the 529 plan administrator to formally request the rollover. Most plan administrators have a specific form or a defined procedure for this type of transaction.

The recommended method for the transfer is a direct, trustee-to-trustee transfer. This means the 529 plan administrator sends the funds directly to the Roth IRA provider without the beneficiary ever taking possession of the money. This method minimizes the risk of accidental tax consequences or penalties that can arise from an indirect rollover.

After submitting the rollover request, there will be a processing period that can range from several business days to a few weeks. It is advisable to follow up with the 529 plan to confirm when the funds have been sent. Subsequently, you should verify with the Roth IRA institution that the funds have been received and correctly coded as a 529-to-Roth rollover to ensure proper tax reporting.