529 to Roth IRA Rollover – What you must know to transfer from a 529 to Roth

One big change from Secure Act 2.0 was the allowance of unused funds to be rolled from a 529 account to a Roth IRA beginning in 2024. There’s a lot of fine print, which we’ll cover in a minute. But if you do everything correctly, you will be able to transfer up to $35,000 of leftover money in 529s from a 529 account to a Roth IRA.

Rules for the 529 to Roth IRA Rollover

Here’s the three main rules you need to know about in order to take advantage of this opportunity:

First, the 529 must have been opened for 15 years before you do the transfer to a Roth IRA. And, no 529 contributions, or earnings from contributions from the last 5 years are allowed to be transferred.

Second, the owner of the Roth IRA must be the plan beneficiary of the 529. Most 529s are set up with a parent or grandparent as the owner and the child or grandchild as the beneficiary. That means that with the most common beneficiary designation on 529 accounts today, the money with a college savings account can only go into the child or grandchild’s Roth IRA.

Third, any amount you roll over from a 529 will count towards your annual contribution limits for Roth IRAs, and the owner of the Roth IRA must have income to qualify them for Roth IRA contributions in the year the transfers take place.

If you do not meet the rules above or have qualified education expenses, any earnings from non-qualified withdrawals from a 529 will be taxed at federal and potentially state income tax rates, and be subject to a 10% penalty.

Other Ways to use Excess 529 College Savings Plan Assets

While doing a transfer to a Roth IRA is a great move, sometimes the new rules make it hard to do a qualifying transfer. As a reminder, there are other options for unused 529 plan assets as well:

• You may change the plan beneficiary to another family member so they can use the money for qualified education expenses or college tuition. For example, if one of your children had excess money left over in their college savings account, you are able to do a tax-free transfer of the remaining assets to an account with a different beneficiary, such as a different child.
• If your child received a scholarship or grant, you may be able to get money out of a 529 savings account without taxes or penalties.
• You can use up to $10,000 of 529 to pay towards qualified student loans. It can be advantageous for families to take out Stafford student loans even if they have a sizeable 529 account balance. These families may find that they are in a position where there are still assets left in a 529 plan, the child has finished school, and there are student loans outstanding. In this case, using the remaining 529 assets to pay towards student loans can be a great use of excess 529 savings balance.

Using the 529 to Roth Transfer

The lifetime $35,000 lifetime rollover limit is per person. So married households will have the ability to move up to $70,00 from 529 college savings accounts to Roth IRAs.

And, you can do this transfer regardless of your income. Remember that in order to be able to make normal contributions to Roth IRAs your household income must be below a certain threshold set by the IRS.

However, if you meet the requirements listed above, you are able to transfer from a 529 to a Roth IRA regardless of how high your income is. This is a big potential benefit for high income households who earn too much to be able to do regular Roth IRA contributions.

These rules make it necessary for long term planning in order to take advantage of this new benefit. If you are not comfortable navigating these rules or creating a long term plan to take advantage of these new rules, seek help from Arnold and Mote Wealth Management, or another fee-only, fiduciary financial advisor.

For those that are able to take advantage of these new rules, this can result in an additional $70,000 in Roth IRAs for a household over the course of their life.