Rollover Unused 529 Funds to a Roth IRA

The SECURE Act 2.0 created a provision allowing beneficiaries of 529 college savings accounts to roll over unused funds to a Roth IRA. Since January 1, 2024, beneficiaries of 529 accounts have been permitted to do a tax-free, penalty-free rollover to a Roth IRA. Prior to this provision, earnings withdrawn from a 529 account for non-educational purposes were subject to income tax and a 10% penalty.

There are several rules and limitations:

• The 529 account must have been open for at least 15 years. As of this writing, the IRS has not issued formal guidance on whether this 15-year period resets if the account beneficiary is changed — industry commentary increasingly suggests it may, so this is worth discussing with a tax professional before relying on a beneficiary change.
• The rollover cannot include any contributions made in the last 5 years.
• The total amount rolled over in a given year cannot exceed that year's annual IRA contribution limit, reduced by any traditional or Roth IRA contributions the beneficiary makes for that year. (Annual IRA contribution limits change each year — please confirm the current-year figure before discussing specific dollar amounts with a client.)
• There is a lifetime limit of $35,000 per beneficiary on rollovers, though this limit can be reached separately for multiple beneficiaries if each has their own 529 account.

As an example of how the rules were first applied: for the 2023–2024 transition year, the IRS allowed a distribution made after December 31, 2023, and before April 15, 2024, to be rolled over to a Roth IRA by April 15, 2024, and designated as a 2023 contribution, effectively allowing some account holders to use both the 2023 and 2024 annual limits in that window.¹ That specific opportunity has since passed, but it illustrates how the IRS applies annual contribution designations to timing-sensitive rollovers — a detail worth understanding if similar transition rules arise in the future.

This is general information about a complex provision, not individualized tax or legal advice, and state tax treatment of 529-to-Roth rollovers varies — some states do not conform to the federal treatment. Whether this strategy makes sense depends on your specific circumstances, including your account's history, your state of residence, and your other retirement contributions.

If you have questions about this strategy, 529 plans, Roth IRAs, or other wealth planning strategies, please reach out to schedule a time to talk.

1. Internal Revenue Service, Instructions for Forms 1099-R and 5498 (U.S. Department of the Treasury, Dec. 18, 2023), https://www.irs.gov/pub/irs-prior/i1099r--2023.pdf. 

Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of FINRA website for additional information.