When and How a 529 Can Be Converted to a Roth IRA

The SECURE Act 2.0 introduced a change allowing unused 529 education savings plan funds to be rolled over into a Roth IRA. This provision offers flexibility for funds initially saved for educational expenses. This allowance is not universal and comes with specific requirements.

Conditions for 529 to Roth IRA Rollovers

A 529 plan must meet several conditions to be eligible for a rollover into a Roth IRA. The 529 account must have been established for at least 15 years prior to the rollover. Changing the designated beneficiary of the 529 plan may restart this 15-year clock.

The Roth IRA receiving the funds must be owned by the same individual who is the designated beneficiary of the 529 plan. The beneficiary must also have earned income at least equal to the amount being rolled over in the year of the transfer.

The annual rollover amount is capped by the yearly Roth IRA contribution limit for the beneficiary, which is $7,000 for 2025, or $8,000 if the beneficiary is age 50 or older. Any regular Roth IRA contributions made by the beneficiary in that year will reduce the available rollover amount. For instance, if the beneficiary contributed $5,000 to their Roth IRA in 2025, they could only roll over an additional $2,000 from their 529 plan that year. A lifetime maximum of $35,000 can be rolled over from a 529 plan to a Roth IRA for any single beneficiary.

Contributions made to the 529 account within the five years immediately preceding the rollover date are not eligible for the rollover. This “five-year seasoning rule” applies to both the contributions and any earnings generated from those recent contributions.

Tax Treatment of the Rollover

The tax treatment of a 529 to Roth IRA rollover is favorable, provided all conditions are met. Principal contributions made to the 529 plan are tax-free when transferred to a Roth IRA because contributions to 529 plans are made with after-tax dollars.

Earnings accumulated within the 529 plan are not subject to federal income tax or the usual 10% penalty upon rollover to a Roth IRA. This tax-free treatment of earnings is a benefit of this provision, as non-qualified withdrawals from a 529 incur both income tax and a penalty on the earnings portion. The rollover is considered a “qualified distribution” for 529 plan purposes, which helps avoid these penalties.

While the rollover itself is tax-free at the federal level if all requirements are met, remember the Roth IRA’s own five-year rule for qualified distributions of earnings. This rule dictates that earnings within the Roth IRA can only be withdrawn tax-free and penalty-free if the account has been open for at least five years and certain other conditions, such as reaching age 59½, are met. The 529 rollover starts a new five-year clock for the rollover amount if it is the first contribution to that specific Roth IRA.

For tax reporting purposes, the 529 plan administrator will issue a Form 1099-Q, “Payments From Qualified Education Programs (Under Sections 529 and 530).” While this form reports the distribution from the 529 plan, a qualified rollover to a Roth IRA does not need to be reported as taxable income on your federal tax return. The Roth IRA custodian will report the rollover amount on Form 5498, “IRA Contribution Information,” specifically in Box 10 as Roth IRA Contributions, rather than as a rollover contribution in Box 2.

Completing the Rollover Transaction

Initiating a 529 to Roth IRA rollover involves coordination between the 529 plan administrator and the Roth IRA custodian. It is advisable to begin by contacting both financial institutions to understand their specific procedures for this type of transfer.

The process involves requesting a direct rollover, also known as a trustee-to-trustee transfer. This method is preferred because the funds are sent directly from the 529 plan to the Roth IRA, avoiding constructive receipt by the beneficiary. This helps prevent any potential tax implications that might arise if the funds were first distributed to the beneficiary and then re-contributed.

The 529 plan administrator will likely require a distribution request form, while the Roth IRA custodian may have a specific form for rollover contributions. These forms will ask for information such as the 529 account details, the Roth IRA account number, and the precise amount to be transferred. It is essential to ensure the requested rollover amount adheres to both the annual and lifetime limits, as well as the five-year seasoning rule for contributions.

After completing and submitting the necessary paperwork, it is important to track the progress of the rollover. Confirming with both the 529 plan and the Roth IRA custodian that the transfer has been successfully completed provides assurance. Maintaining thorough records of all communications, submitted forms, and confirmation statements is a prudent practice for future reference and tax purposes.