529-To-Roth IRA Conversions: What To Know And How To Roll Funds Over

A 529 plan is a great way to save for your child’s college education. There are instances, though, when you may no longer need to use it for qualified educational expenses. Whether it’s because your child received scholarships and grants or went to a college that has lower tuition costs, there are other options for that money. Aside from changing the beneficiary on the account, you can transfer funds from a 529 to a Roth IRA.

Can You Transfer A 529 To A Roth IRA?

According to the SECURE 2.0 Act, as of 2024, you can transfer unused 529 account funds to a Roth IRA tax- and penalty-free. However, your account must meet a few requirements to roll funds over without paying federal taxes or facing penalty fees.

You’ll want to be sure that you meet the requirements to transfer funds from your 529 plan to a Roth IRA. It’s best to speak with a reputable financial advisor to see what your options may be.

529-To-Roth IRA Rules

As of 2024, you can convert funds from a 529 account to a Roth IRA up to a $35,000 lifetime limit with no tax or penalties. That is, as long as the owner of the Roth IRA is the beneficiary of the 529 account. Your child or whoever you have your 529 account for needs to have their own Roth IRA account.

What’s more, the 529 needs to have been open for at least 15 years and the amount transferred needs to have been in the account for a minimum of 5 years. Plus, you can only transfer funds up to the annual contribution limits for the beneficiary. In 2023, the Roth IRA contribution limit was $6,500 and is $7,000 in 2024 for most people. Meaning, if you want to convert $15,000 from a 529 to a Roth IRA, you will most likely have to do that over 2 to 3 years.

Contribution limits for Roth IRAs can increase each year, so if you plan on rolling over funds over several years, check the IRS website to check the maximum amount allowed. Remember, this rollover regulation only applies to Roth IRAs and not traditional IRAs.

Pros And Cons Of A 529 Plan-To-Roth IRA Rollover

Converting extra 529 funds into a Roth IRA sounds like a great solution to help jumpstart your child’s retirement.

However, there are several drawbacks, including the fact that there doesn’t seem to be enough guidance as to the exact amount you can convert, or how to avoid paying extra costs. Some states may not consider rollovers as a qualified 529 expense, which could mean you’ll incur penalties. Opening a Roth IRA means that your child needs to earn a certain income, though there doesn’t seem to be any clear guidance from the government whether this would apply to 529 plan rollovers.

How To Transfer 529 Funds To A Roth IRA

1. Determine the amount you want to roll over. Although you can transfer a maximum of $35,000 over a lifetime from a 529 to a Roth IRA, you may not want to. Look at what you currently have in the 529 and carefully assess whether your child needs some of the funds for qualified education expenses first. Then, finalize the amount you want to transfer.
2. Calculate the transfer timeline. Since Roth IRAs have contribution limits each year, you may not be able to transfer the entire desired amount at once. Instead, you may need to space it out so you don’t incur any penalties. For example, using the $7,000 annual Roth IRA contribution limit for 2024, you will need to transfer your 529 funds over a 5-year period if you plan on transferring $35,000 in total.
3. Check that the 529 qualifies for a transfer. Double check if the 529 account has been open for at least 15 years. Also, whether the funds you want to transfer have been in the account for a minimum of 5 years. If not, you’ll need to wait to make your transfers. Otherwise, you may have to pay taxes and penalties.
4. Open a Roth IRA account. Have your child open a Roth IRA themselves (if they’re of legal age), or you can open one for them. You may have to prove your child is earning enough income to open an account. Shop around brokerages to see which account is the best fit.
5. Initiate the transfer. Once the Roth IRA account is open, contact both your 529 plan and brokerage where the Roth IRA is held to initiate transfer of funds. Be sure to follow their instructions carefully, including what type of paperwork to submit.

The Bottom Line

Converting money from a 529 account to a Roth IRA may be a great idea if you want to put unused education funds toward your child’s retirement. After all, extra time in the market means ample opportunity to take advantage of the wonders of compound interest. As you’re helping secure your child’s financial future, don’t forget about yours. To keep an eye on your everyday spending, financial goals and even your own Roth IRA, consider downloading the Rocket Money℠ app — it’s free.