Here’s How a 529 to Roth IRA Rollover Works

Starting in 2024, you can perform a 529 to Roth IRA rollover if you have leftover funds in the education plan. This presents a great way to continue growing and protecting tax-free wealth—turning education funds into retirement funds. However, you must follow specific rules to ensure this transaction is seamless, tax-free, and compliant with IRS regulations. This article explains those rules to help you successfully navigate this transaction.

What Is a 529 to Roth IRA Rollover?

There are numerous reasons to have leftover money in a 529 plan. And there are multiple ways to repurpose unused 529 funds. Depending on the situation, one of the most beneficial decisions is to roll those funds into a conventional or self-directed Roth IRA. Section 125 of the SECURE Act 2.0 enacted this type of rollover. In 2024 and beyond, you can move leftover 529 funds into a Roth account. When performed correctly, you avoid federal taxes and penalties, and you may avoid state taxes and penalties, as well.

Because a 529 to Roth rollover is new, some call it a “529 conversion to a Roth IRA.” However, there is a difference between a rollover and a conversion.

A Roth conversion occurs when people move funds from retirement accounts that accept pre-tax contributions (like traditional IRAs or 401(k)s) into a Roth account, which accepts after-tax contributions. In essence, you are turning pre-tax funds into post-tax funds. And the pre-tax funds you convert are taxed in the year you move them.

A rollover refers to moving funds from one retirement plan to a similar plan An image with a hand pointing to text that says 529 to Roth IRA rollover.without incurring tax or a penalty. For example, rollovers are common when you change jobs and move your 401(k) from one employer to a new employer plan or into a traditional IRA. You don’t change the tax-sheltered treatment of the plan like you do when converting retirement funds.

Since both 529 and Roth accounts accept post-tax contributions, moving 529 funds to the Roth account doesn’t impact the tax treatment of the funds. The difference is you’re moving education funds—instead of funds from another retirement plan—into a Roth IRA. Their tax treatment of both accounts is the same, making the 529 to Roth rollover a non-taxable event. And that makes this transaction easy if you follow the rules.

Rules for 529 to Roth IRA Rollovers

Most people know that Roth retirement accounts have income limits. If your income exceeds those limits, you cannot contribute to a Roth account. However, like the Roth conversion, a 529 rollover to Roth transaction allows you to bypass that rule.

    • This education plan must have been in place a minimum of 15 years before performing a 529 to Roth rollover.
    • The Roth IRA must be in the 529 beneficiary’s name.
    • A beneficiary must have earned income to qualify for a Roth account.
    • There is a lifetime rollover cap of $35,000.
    • 529 funds rolled over cannot exceed the annual contribution limit for Roth plans.
    • You can perform rollovers each year that don’t exceed the retirement plan’s annual contributions until you satisfy the $35,000 lifetime 529 to Roth rollover limit.

Additionally, one benefit of a 529 is the ability to change plan beneficiaries. So, if you are a parent who established the education plan for a child, you can remove your child and appoint yourself as the beneficiary of those funds. Then, you can roll the funds over into your own Roth IRA.

Final Considerations

A 529 rollover is a solid strategy for repurposing unused education savings. Roth accounts have more flexible benefits than typical retirement accounts, including tax-free distributions of earnings and no required minimum distributions in retirement. Turning a child’s unused education funds into retirement savings gives them a head start in building a successful nest egg for his or her future.

It’s important to note that although 529s are governed by Internal Revenue Code 529, they are also governed and maintained by state-run agencies and educational institutions. While a 529 plan rollover to a Roth IRA doesn’t trigger federal tax or penalty, it may impact both on a state level. The rules for these plans vary from state to state. So, check with your CPA or financial advisor before making this move.

If you have questions about a 529 to Roth rollover, please contact Advanta IRA.

Additional resources on education savings plans:

Why Open a Self-Directed Education Savings Account?

What Can I Do with Unused 529 Funds in My Education Plan?

What Are Alternative Investments? Here’s a List of 120+ for You & Your SDIRA

 

 

 

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.