529-to-Roth: Now Available, But Questions Persist

By Andy Ives, CFP®, AIF®
IRA Analyst
Follow Us on X: @theslottreport

Just over a year ago (December 2022), the SECURE 2.0 Act was signed into law. That legislation contained an extensively discussed provision – allowing excess dollars in a 529 college savings plan to be rolled over to a Roth IRA. At the time, we knew there were a couple of unanswered questions in the law as it pertained to the 529-to-Roth transaction. However, since the 529-to-Roth rollover was not permitted until this year (2024), it was anticipated that any nebulous language or confusion would be cleared up well before the 2024 calendar change.

Well, it is a year later, and we have received no guidance from the IRS concerning 529-to-Roth-IRA rollovers. We are now live. This transaction can be completed, and this year we have already spoken to advisors looking to move 529 money to a Roth IRA. As this is a brand-new strategy for 2024 and beyond, it is important to understand the finer points of the transaction – as well as the still-unknown details:

• Yes, if you have excess dollars in a 529, you can now proceed with a tax-free 529-to-Roth-IRA rollover. Contact your 529 provider for directions.
   
• The maximum amount that can be rolled over is $35,000. There is currently no indexing of this number for inflation. The $35,000 limit is a lifetime maximum, and it appears to be per beneficiary. (Meaning, a parent with multiple children could potentially roll over $35,000 per child. More guidance is necessary here.)
   
• The Roth IRA must be in the name of the 529 beneficiary – not the 529 owner (if different).
   
• The 529 plan must have been open for more than 15 years. It is still unclear if a new 15-year waiting period is required when a 529 is transferred to a new beneficiary. (Will the existing time period applicable to the initial account opening carry over to the new beneficiary? Further clarification from Congress or the IRS is required.)
   
• Rollover amounts cannot include any 529 contributions (or earnings on those contributions) made in the preceding five-year period.
   
• Rollovers are subject to the annual Roth IRA contribution limit. So, for example, since the Roth IRA contribution limit in 2024 is $7,000, then no more than $7,000 can be rolled over from a 529 to a Roth IRA in 2024. Further, any actual Roth IRA (or traditional IRA) contributions made by the 529 beneficiary will count against the permitted rollover amount. As such, a full $35,000 529-to-Roth IRA rollover would need to be done over several years. It also means the 529 beneficiary doing the rollover must have compensation in the year of the rollover at least equal to the amount being rolled over.
   
• There are no income limits restricting the 529-to-Roth IRA rollover for either the beneficiary or 529 owner.
   
• The rollover from the 529 plan to the Roth IRA is a nontaxable transaction.
   
• When former 529 dollars are ultimately distributed from the Roth IRA, any funds rolled over will be treated as if they were rolled over from another Roth IRA. The ordering rules will apply. Contributions come out tax- and penalty-free, and earnings come out tax- and penalty-free if the distribution is qualified (i.e., 5-year rule and age 59 ½).

It is important to be aware of the finer details of a 529-to-Roth IRA rollover. But also recognize that some questions remain unanswered.