Convert a 529 Plan to a Roth IRA?

By Marina Pappas, Law Clerk

For families utilizing 529 plans to save for their children’s higher-education expenses, SECURE Act 2.0 provides certain penalty-free rollovers for 529 account beneficiaries. 

Beginning in 2024, beneficiaries of college 529 savings accounts are authorized to rollover up to $35,000 of leftover funds during their lifetime to their Roth IRA without paying taxes or penalities.¹  These rollovers are subject to various restrictions, including but not limited to annual Roth IRA contribution limits, which is currently capped at $6,500 per year, and the 529 account must have been open for more than 15 years.²   

Previously, any unused 529 funds withdrawn from the account for non-qualified purposes were subject to income tax and a 10% penalty.  Although, an exception to the withdrawal penalty for any unused funds was to transfer the funds to another qualified beneficiary who could apply those funds to their education expenses.

However, consider the additional following eligibility criteria prior to making a decision regarding rolling over unused 529 savings to a Roth IRA:

• The rollover is subject to the requirement that a Roth IRA owner have includible compensation at least equal to the amount of the rollover.
• Contributions made to the 529 plan in the last five years, including the associated earnings, are ineligible for a tax-free transfer.³

Sources:

[1]https://www.finance.senate.gov/imo/media/doc/Secure%202.0_Section%20by%20Section%20Summary%2012-19-22%20FINAL.pdf

[2], [3] https://www.thrivent.com/insights/retirement-planning/the-secure-act-2-0-allows-a-529-plan-rollover-to-a-roth-ira