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529 to Roth IRA Transfers

August 02, 2023

One of the reasons many people are apprehensive about setting up a 529 college savings plan is the question of what to do with any unused funds should the beneficiary not attend college or have funds remaining after completing college. The prospect of paying taxes and a penalty on the plan earnings to withdraw the unused funds make the 529 plan savings vehicle appear less attractive. Fortunately, there will soon be another option for unused 529 plan funds.

Starting in 2024, up to $35,000 of unused funds in a 529 plan can be rolled directly to a Roth IRA tax and penalty free. However, there are a number of rules that must be met to qualify for this option. First, the 529 plan must have been established for at least 15 years and the Roth IRA used for the transfer must be in the name of the beneficiary of the 529 plan. So, this strategy must be part of a long-term educational/retirement savings plan for a given beneficiary.  

Second, the 529 plan assets cannot be converted to a Roth IRA all at once. The transfers to the Roth must conform with the Roth IRA contribution limits which is the lesser of $6,500 or the owner’s earned income for the year. So, it will likely take years to convert the full $35,000 from a 529 plan to a Roth IRA. In addition, the transfer from a 529 plan to a Roth IRA is counted as a contribution for the tax year so it may preclude other contributions to the Roth IRA. On the bright side, the income limitation that precludes high-income earners from contributing to a Roth IRA does not apply to funds transferred from a 529 plan.