Rolling funds from a 529 acocunt to a Roth IRA

Do you have a 529 account that you don't need for education anymore?

You’ve got options:

1. Liquidate it and pay income tax + 10% penalty on the gains (ouch!)

2. Name a new beneficiary (child, grandchild, yourself...) and use it for their qualified education expenses.

3. Leave it as a legacy to support the education of future generations. Be sure to name the successor owner (an individual who is 18 or over, or your trust) to fulfill your wishes.

4. **NEW** Jumpstart your original beneficiary's retirement savings by rolling up to $35k to their Roth IRA over time. Read on to find out how and what to look out for.

A 529 plan is traditionally known for helping families save for education expenses. However, recent legislative changes have introduced an exciting new possibility: The ability to roll over funds from a 529 plan to a Roth IRA was created under the SECURE 2.0 Act of 2022. This portion of the law went into effect beginning January 1, 2024.

This feature can be a powerful tool for jump-starting retirement savings, but it has specific rules and limitations.

Here’s what you need to know.

Key Rules for 529-to-Roth IRA Transfers

1. Beneficiary Restrictions The Roth IRA receiving the funds must belong to the beneficiary of the 529 plan. The account owner cannot transfer the funds to their own Roth IRA unless they are also the beneficiary of the 529 plan.

2. Time Requirement: The 529 account must have been open for at least 15 years before any rollover to a Roth IRA can occur. Changing the beneficiary of the 529 to yourself or another eligible beneficiary restarts the 15-year clock. Additionally, contributions made to the 529 plan within the last five years, including earnings on those contributions, are ineligible for rollover.

3. Annual Contribution Limits Any rollover from a 529 plan to a Roth IRA counts toward the annual Roth IRA contribution limit. For 2025, this limit is $7,000 (or $8,000 for individuals aged 50 and older). If the beneficiary has other income or contributions that year, the total amount contributed to the Roth IRA cannot exceed the annual limit.  While regular Roth IRA contributions are subject to income restrictions, rollovers from a 529 plan to a Roth IRA are not. This makes the 529-to-Roth IRA rollover feature especially beneficial for high-income individuals who might not otherwise qualify to contribute directly to a Roth IRA.

4. Lifetime Cap: There is a lifetime rollover limit of $35,000 per beneficiary. This cap ensures that the 529-to-Roth IRA feature is used to supplement retirement savings rather than a primary vehicle.

5. Earned Income Requirement: The beneficiary must have earned income equal to or greater than the amount rolled over into their Roth IRA in a given year. For example, if a beneficiary earns $5,000 in a year, the maximum that can be rolled over from a 529 plan to their Roth IRA is $5,000, subject to the annual contribution limit.

How It Works in Practice

Let’s say you’ve been diligently saving in a 529 plan for your child’s education, but they end up receiving scholarships or attending a lower-cost institution, leaving a surplus in the account. If the 529 account has been open for at least 15 years, and the beneficiary has earned income, you can roll over up to the annual Roth IRA contribution limit each year until the $35,000 lifetime cap is reached.

For example, if your child earns $8,000 in their first job after graduation and the annual Roth IRA contribution limit is $7,000, you can roll over $7,000 from the 529 plan into their Roth IRA for that year.

Benefits of This Strategy

This new feature provides a unique opportunity to repurpose leftover 529 funds, ensuring they don’t go to waste. It also helps young beneficiaries start building a tax-advantaged retirement savings account, which can grow over decades to provide financial security later in life. To maximize the benefit, families can plan rollovers over multiple years, starting as soon as the beneficiary earns income and meets the eligibility requirements. This allows the funds to start growing in a tax-advantaged Roth IRA as early as possible.

Final Thoughts

While the ability to roll over 529 funds to a Roth IRA offers exciting possibilities, it’s essential to carefully plan around the restrictions and limitations. Consulting with a financial advisor can help you navigate these rules and maximize this new savings opportunity for your family’s financial future.