Qualified tuition plans, more commonly known as 529 plans, allow you to save for educational expenses on a tax-advantaged basis. While the rules for 529 plans offer a lot of flexibility in what expenses are covered, and even allow you to change the beneficiary in certain circumstances, once college is over, you may still end up with money in the account and no eligible costs left to pay for.
To avoid leaving left-over funds within the plan, it is possible to take a distribution, however, any amounts withdrawn and not used for eligible education expenses are subject to a penalty tax.
Starting in 2024, however, the IRS now allows you to roll the money over to a Roth IRA. And, as long as all the requirements are met, the rollover will be tax- and penalty-free.
Because 529 rollovers are new, there are still some gray areas, but here is what we currently know.
What are the requirements to roll over 529 funds to a Roth IRA?
There are currently very specific guidelines on when 529 plan funds can be moved to a Roth IRA:
The account must have existed for at least 15 years. (Further guidance is needed from the IRS, as it is unclear if this 15-year clock is reset if the beneficiary of the 529 plan is changed.)
The amount in the 529 plan contributed in the past 5 years (including the earnings on those contributions) is not eligible to be rolled over.
The amount that can be rolled over each year is reduced by any actual contribution made to either a traditional or Roth IRA by the IRA account owner for that year.
Who can rollover money from a 529 plan to a Roth IRA?
The beneficiary of the 529 plan can rollover the money to their own Roth IRA. It doesn't matter who contributed the money to the plan or who owns the account – only who the beneficiary is.
How much can be rolled over from a 529 plan to a Roth IRA?
In general, there is a lifetime limit of $35,000 per beneficiary. This includes all rollovers from any 529 plan to any Roth IRA for that beneficiary.
In addition to the lifetime maximum, rollovers are also restricted to the IRA contribution limit for that year. If the eligible amount in the 529 plan is over the Roth IRA contribution limit, the beneficiary can complete rollovers across multiple years until either the entire eligible amount has been moved or the lifetime limit has been hit.
Does the beneficiary need to be eligible to make a Roth IRA contribution to complete a 529 rollover?
Yes and no. The beneficiary has to have enough earned income to cover the rollover amount. However, the rollover is not subject to the income limitations that apply to typical Roth IRA contributions.
How do I request a rollover from a 529 plan to my Guideline Roth IRA?
If you would like to complete a rollover from a 529 plan to your Guideline Roth IRA, please reach out to a Guideline representative at ira@guideline.com. We’ll be happy to help you get the process started.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.