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“Most” Americans can now convert a 529 plan to a Roth IRA. But there are many “catches” you should be aware of.
There are several new benefits for investors in 529 plans. The SECURE 2.0 Act of 2022, contained in the Consolidated Appropriations Act of 2023 (P.L. 117-328), includes several new benefits for investors in 529 plans and ABLE accounts that you need to know about.
The most headline-grabbing change brought about by the Secure Act 2.0 was the ability to roll over up to $35,000 from a 529 plan to an IRA—a change that took effect in 2024. This was another addition that made the 529 plan a robust savings and investment tool for education and now potentially retirement.
Here's what you need to know about rolling over a 529 plan to an IRA.
Rollover from a 529 plan to a Roth IRA
Familys May be able to roll over money from a 529 plan to a Roth IRA owned by the 529 plan beneficiary.
You can't roll the money over to a Roth IRA owned by the 529 plan account holder or anyone else—only the beneficiary. Of course, you can change the 529 plan beneficiary and then roll the money over to the new beneficiary's Roth IRA.
Rollover limits
There is a lifetime limit of $35,000 per beneficiary. The maximum limit is per personnot per 529 plan, so the limit applies regardless of the number of 529 plans.
However, you can roll over up to $35,000 per beneficiary to multiple beneficiaries. You are also free to change the beneficiary of the 529 plan, but there is still a limit per beneficiary.
The 529 plan must have been in existence for at least 15 years. Only funds that have been in the 529 plan for at least five years can be rolled over.
The transfer must be made by a trustee-to-trustee transfer.
Combining 529 plan and Roth IRA contribution limits
The contribution limits for Roth IRAs (annual dollar limits) still apply, so the rollover from a 529 plan to a Roth IRA is capped. It includes the annual contribution limits for Roth IRAs minus any other contributions made to a beneficiary's IRA that year.
Because of the conflicts between the $35,000 lifetime limit and the annual contribution limits, rolling over any remaining balance in a 529 plan can take several years.
The income restrictions for Roth IRAs do not apply with respect to a Roth IRA rollover.
The contributions and earnings of a rollover from a 529 plan are proportional, and this is rolled over to the Roth IRA. So you can get the contribution portion of the rollover back tax-free after it is received in the Roth IRA.
What you should pay attention to
Many are touting this as a great new way for families to help their children save for college and retirement.
However, it is important to be aware that there is a major catch.
That said, each state sets its own rules for 529 plan qualifying distributions. Some states may not consider 529 plan rollovers to an IRA to be a qualifying distribution. In fact, only 33 states currently allow it.
In this case, if you roll over the funds, you could face taxes and a penalty on the amount rolled over. The fact that it's a rollover doesn't help, as some states consider a rollover to a 529 plan non-qualifying if it's an out-of-state 529 plan.
Before you jump into this, make sure your state complies with federal regulations. Some states may comply out of the box, while others (notably California) typically don't.
Find your state in our 529 Plan Guide or click on your state in the map below:
Who should consider this option?
The Roth IRA rollover feature is a useful tool for people who have money left in their 529 plan. It also eliminates some investors' concerns about balancing saving for college with saving for retirement (or potentially paying a penalty for excessive 529 plan contributions).
Moving forward
There are some details in the law that the IRS needs to clarify. For example, the rollover is limited to contributions made during the five years prior to the date of the distribution plus any earnings attributable to the contributions.
It is unclear whether this refers to income from the last five years before the date of distribution or also to subsequent income. The legal wording is also difficult to understand because it contains double negatives.
The new rules apply to all qualified tuition programs, including 529 plans and prepaid tuition plans, but not to Coverdell education savings accounts.
Don't forget to stop by Student Loans and Financial Aid Programs by State to find more ways to save on your tuition fees.
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