For many college students, 529 plans have emerged as one of the most effective methods of saving for higher education expenses. These plans allow contributions on behalf of a beneficiary, which are then invested so that the funds—and any investment growth—can later be withdrawn tax-free to pay for qualified educational expenses. A key limitation of 529 plans is the restriction on using the funds for purposes other than qualified educational expenses. While the original contributions can be withdrawn tax-free at the federal level, any growth on those contributions is subject to taxes and an additional 10% penalty if used for non-qualified purposes. In 2022, Congress included a provision in the SECURE 2.0 Act that allows beneficiaries of 529 plan accounts to roll over funds into a Roth IRA in their name, tax- and penalty-free.

This new provision is a great option for an individual who has an overfunded 529 plan or elects to move forward without spending 529 savings on education. However, there are some rules to consider when rolling over funds from your 529 plan to a Roth IRA.

The 15-Year Rule

The 529 plan needs to have been in existence for at least 15 years before a 529-to-Roth rollover can be made.

Congress has not made it clear if the person rolling the funds over needs to have also been the beneficiary for all 15 of those years. For now, it’s safest to only execute rollovers from 529 plans where both the plan and the beneficiary have been in place for at least 15 years.

The 5-Year Rule

The rollover must be made using funds that have been in the 529 plan for at least 5 years. Funds contributed to a 529 plan in the last 5 years, and any earnings on those funds, cannot be rolled over to a Roth IRA.

EXAMPLE: Steve is the beneficiary of a 529 plan that has been maintained in his name for the last 15 years. In Year 1 of his plan, Steve’s parents contributed $1,000 on his behalf. In Years 11–15, they contributed $10,000.

If Steve wanted to make a 529-to-Roth rollover this year (i.e., in Year 15), assuming he meets all the other qualification criteria, he would only be eligible to roll over $1,000 (plus any earnings attributable to that contribution)

If he wanted to complete another rollover next year, he would be eligible for a higher amount. His $10,000 contribution in Year 11 would now be greater than 5 years and would thus count toward the annual contribution limit.

Annual Rollover Limit Rule

At a high level, the amount that someone can roll from a 529 plan into a Roth IRA in a year is limited to the IRA contribution limit for that year (e.g., $7,000 for those under 50 in 2025), plus catch-up contributions ($1,000 for individuals age 50 and over).

However, there are 2 important caveats that apply, both having to do with the income of the person doing the rollover:

1. The individual needs to have earned income to roll assets from a 529 plan to their Roth IRA. The amount they can roll over is the lesser of their earned income or the annual IRA contribution limit.
2. Unlike making a normal Roth IRA contribution, where the ability to contribute to a Roth phases out for individuals with higher incomes, there are no income-based phaseouts for a 529-to-Roth rollover.

Lifetime Maximum Rule

The language of the law leaves uncertainty on whether you can roll over $35,000 from each 529 plan for which you are a named beneficiary or if a beneficiary is limited to rollovers totaling $35,000.

For now, we recommend only rolling over an aggregate lifetime limit of $35,000 per beneficiary.

529-To-Roth Rollovers and Roth IRA Withdrawal Rule

For a Roth IRA distribution to be considered “qualified” and, therefore, tax-free, it needs to meet 2 separate requirements:

1. The distribution occurs on or after the date the IRA owner turns 59 1/2 (or occurs after the death or disability of the owner, or is made for up to $10,000 of first-time homebuyer expenses); and
2. The distribution needs to be made at least 5 tax years after the owner makes their first contribution to any Roth IRA

If the taxpayer has made any Roth IRA contributions beginning at least 5 tax years before the 529-to-Roth rollover (and is also age 59 1/2 or older), they can immediately withdraw the rolled-over funds as a tax-free qualified distribution.

State Tax Implications

While many states do appear to conform to the Federal law treatment, it is important to verify the 529-to-Roth rollover treatment in your state to be aware of any tax implications.

Some states will treat the 529 to Roth rollover as a non-qualified distribution and it will be subject to state income tax.

 If you are interested in exploring more into this opportunity, please discuss it with your Bartlett advisor.