Families with 529 college savings plans have the ability to roll over unused funds into a Roth IRA, tax-free. This flexibility can help repurpose education savings for retirement, but it comes with specific rules and considerations. Below, we break down the process, requirements, and key factors to consider when converting a 529 plan to a Roth IRA.
Key Requirements for the Rollover
Same Beneficiary: The 529 account and the Roth IRA must be for the same individual. You cannot transfer funds to another person’s Roth IRA.
15-Year Rule: The 529 account must have been open for at least 15 years. Contributions made within the last 5 years, along with their earnings, are ineligible for rollover.
Annual Contribution Limits: The rollover counts toward the annual Roth IRA contribution limit, which is $7,000 in 2025 for individuals under 50 (subject to change in future years). The beneficiary must have earned income (e.g., from wages or self-employment) at least equal to the rollover amount.
Lifetime Cap: There’s a $35,000 lifetime limit per beneficiary for 529-to-Roth IRA rollovers. This can be spread over multiple years, subject to the annual Roth IRA limit.
Direct Rollover: The transfer must go directly from the 529 plan to the Roth IRA to avoid taxes or penalties.
Unlike regular Roth IRA contributions, these rollovers are not subject to income phase-out limits, making them accessible regardless of the beneficiary’s income level.
Example
Imagine a 529 plan with $40,000, opened 15 years ago, with $10,000 contributed in the last 5 years. Only $30,000 is eligible for rollover (since recent contributions are excluded). If the beneficiary has $8,000 in earned income in 2025, they could roll over up to $7,000 to a Roth IRA (assuming the 2025 Roth IRA limit is $7,000). They could continue rollovers in future years, up to the $35,000 lifetime cap, as long as they have sufficient earned income.
Important Considerations
State Tax Rules: While the federal government allows tax-free rollovers, some states may not conform to these rules and could impose taxes or penalties. Check your state’s tax laws to avoid surprises.
Financial Aid Impact: Converting 529 funds to a Roth IRA may affect the beneficiary’s eligibility for financial aid, as Roth IRA assets are treated differently than 529 plan assets in aid calculations.
No Double-Dipping: You cannot use the same 529 funds for both tax-free education expenses and a Roth IRA rollover. Choose the purpose carefully.
Benefits of the Rollover
This option provides significant flexibility for families with unused 529 funds. By transferring savings to a Roth IRA, the beneficiary can benefit from tax-free growth and withdrawals in retirement, without the pressure to use the funds solely for education. The lack of income limits for these rollovers also makes this strategy accessible to a wide range of beneficiaries.
