529-to-Roth Rollovers – What are they?
“Go to the ant, O sluggard, study her ways and learn wisdom; For though she has no chief, no commander or ruler, She procures her food in the summer, stores up her provisions in the harvest” (Proverbs 6:6-8).
One of the most common college savings vehicles right now is a 529 plan. These plans have tax advantages, are easy to set up, and allow the opener to remain in control of the funds. That being said, one of the major drawbacks is that the money within the fund must be spent on qualified education expenses or the distributions from the account earnings are subject to income tax and a 10% penalty. This begs the question: What is the right amount to save?
Whether you are a recent grad with money left in your 529 or someone thinking about opening a 529 for a loved one, it is important to understand the rules and restrictions. One of the latest options within these account types is the 529-to-Roth Individual Retirement Account (IRA) rollover. Within the SECURE 2.0 Act, Congress provided a new opportunity, allowing 529 funds to be rolled into a Roth IRA account without any taxes or penalties. There are some caveats to this option, however.
Why would I need this option?
With the rising cost of college, you might find yourself wondering if there is any way you can save enough money for your child or loved one to avoid taking out student loans. The idea of overfunding a college account seems like a very remote reality. However, there is also a rise in people deciding not to go to college. While this started during the COVID-19 pandemic and has begun to shift back, there are still plenty of people deciding to pursue a trade or other career path. As a Catholic, this could also mean discerning religious life or the priesthood.
While 529 funds never expire and can be passed on to another family member by the account owner, circumstances sometimes arise where the account owner would like the money to remain the beneficiary’s. This is where the 529-to-Roth rollover over could make sense.
How does it work?
If you find yourself in the position of an overfunded 529 account, as the beneficiary (person the account is for) working with the owner (typically the person who set up the account and funded it), you can open a Roth IRA for yourself (the beneficiary), and request a rollover check be sent from the 529 account into the Roth. However, there are some restrictions.
Restrictions
The first thing to be aware of is the holding period. The 529 plan must have had the same beneficiary for the 15 years prior to the rollover, and contributions into the 529 need to have been in the account for five years prior to the rollover. This prevents the account owner from switching the beneficiary to herself or someone else and then immediately rolling over the funds.
Next, the rollover is also subject to the annual Roth contribution limit. In 2025, for those under 50, the limit is the lesser of $7,000 or your taxable income from the year (if you are married and do not have an income, you are still possibly eligible for the $7,000 contribution with a spousal IRA but check with a financial professional for all the rules).
This limit has two-fold consequences. First, if you have more than $7,000 left in your 529, you will need to make the rollovers over multiple years and you will not be able to contribute anything additional to an IRA or Roth during those years (unless you rollover less than the contribution limit). You are, however, still eligible to participate in your employer’s retirement plan up to certain limits.
The rollover amount is limited even further, or not an option at all, if there is no income reported on the beneficiary’s taxes. If, for example, the beneficiary does not get a job after she graduates from college, she would not be able to roll over any of the money in that year. The nice thing about rollovers, though, is they are not subject to the income limits the IRS places on Roth contributions. This means that if the beneficiary gets a high-paying job right out of college, she is still able to rollover the annual Roth contribution limit regardless of her income level.
The final restriction to note is that the Roth owner must be the 529 beneficiary. Sometimes this will mean you need to open a new account for the beneficiary so the funds can be rolled over and tracked appropriately.
Final Thoughts
While there are many different options for college savings, 529s remain one of the most commonly used. There are various benefits and drawbacks to all choices, but as with everything, it is important to be educated and informed. The new 529-to-Roth rollover is a great option; however, it does not mean that the 529 is necessarily right for you or your loved ones. Researching all the choices and speaking with a professional who understands you and your family is always the best course of action when making a financial decision. Everyone and every family is different; that is how God created us; that means we all need to be responsible and educated as we discern the right path.
Erica Mathews is a CERTIFIED FINANCIAL PLANNER™ Professional with Financial Counseling Associates, a family-owned financial planning and investment management firm. She helps relieve financial stress with organization, automation and a plan, helping others manage their finances so they can live as God is calling them to. She lives in Colorado with her husband and four kids; they love CrossFit, rock climbing, gardening, and exploring nature. Erica’s email is erica@fca-inc.com.