529 Plan Rollover to Roth IRA: A Comprehensive Guide to this new rule

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Imagine having leftover funds in your 529 plan for your child after graduation. There are plenty of options and moves available within a 529 plan, like changing the beneficiary or just paying the tax on the gains. However, now there is another extremely valuable option.

Recent legislative change has opened up a new possibility. Section 126 of the SECURE 2.0 Act now allows 529 plan rollovers to Roth IRAs. This adjustment creates even more value in an already lucrative 529 plan.  

In this comprehensive guide, we’ll teach you everything you need to know about a 529 plan rollover, its inclusions and limitations, and how you can apply for it to secure your retirement.   

What is a 529 Plan Rollover?

A 529 plan rollover is the process of transferring unused funds from a 529 college savings account into a Roth IRA without paying taxes or penalties. It’s a great way to augment your retirement cache and take advantage of the remaining funds in your 529 plan.

Why You Should Rollover Your 529 Plan to a Roth IRA

There’s more to a 529 plan rollover than additional retirement savings. Here are some specific benefits that you may enjoy.

Take advantage of long-term tax benefits

A Roth IRA grows your savings tax-free, and you won’t pay taxes when you withdraw money in retirement. When you roll over a 529 plan to a Roth IRA, you can benefit from these long-term tax advantages, potentially maximizing your savings over time.

Give flexibility in the use of funds

Unlike a 529 plan, which is specifically for education expenses, a Roth IRA allows you to use the funds for any retirement needs. It can cover your medical bills, mortgage or rent, food, and utilities. Hence, rolling over excess funds from your 529 plan allows you to have more than enough in your golden years.

Enhance financial security in retirement

Roth IRAs aim to help you build a comfortable retirement nest egg. Transferring your 529 funds to a Roth IRA prevents your savings from diminishing since you can withdraw funds tax-free from the latter.

Prevent penalties from occurring

If you use the money in your 529 plan for anything other than qualified education expenses, you’ll pay income taxes and a 10% penalty on the earnings growth.

Fortunately, a 529 plan rollover can help you avoid these costs. Roth IRAs don’t have penalties for withdrawals after age 59½; you can withdraw contributions anytime without penalty.

How Much Can Be Rolled Over to Roth IRA?

Benefits aside, rolling over funds from a 529 college savings account to a Roth IRA has limitations.

  • Your 529 account must be at least 15 years old.
  • The money you want to roll over must have been in your 529 plan for at least five years.
  • The annual rollover amount is subject to the Roth IRA annual contribution limits. For 2024, this limit is $7,500 ($8,000 for age 50 and older).
  • There is a lifetime rollover limit of $35,000 per 529 account beneficiary.
  • Only the person who owns the 529 plan can move the money into their Roth IRA.
  • Roth IRA income limits don’t apply for this type of contribution, making it more accessible for many individuals.

Let’s say you have $20,000 left in your 529 plan. You can roll over $7,500 into your Roth IRA account this year and then the same amount in 2025. You can do this for a few years until you’ve moved over all your money.

Potential Drawbacks and Limitations of 529 Plan Rollover to Roth IRA

Rolling over leftover 529 plan funds to your Roth IRA is not as simple as it seems. Here are some challenges you might face.

You may incur penalties if not done correctly

If you don’t follow the IRS rules for rolling over your 529 plan, you might have to pay a 10% penalty and taxes on the money you make from it. You might also owe unexpected taxes if a 1099-Q form for the rollover is processed incorrectly.

You may owe recapture taxes

In certain situations, you may owe recapture taxes on the 529 plan’s earnings portion if you withdraw them before reaching retirement age or use them for non-education purposes. It can reduce the overall benefit of the rollover.

Some states that charge recapture taxes on 529 plan rollovers are:

  • Alabama
  • Colorado
  • Idaho
  • Montana
  • New York
  • Utah

You can only complete one rollover every 12 months

If you have significant funds in your 529 plan, transferring the entire balance to a Roth IRA may take multiple years.

For example, if you have $30,000 in your 529 plan and the annual rollover limit is $7,000, it would take approximately four years to transfer the entire amount. This limitation can be especially relevant if you need to access the funds sooner, like for medical bills or mortgages.

Your money and efforts may be better spent elsewhere

While 529 plan rollovers to Roth IRAs can offer significant benefits, it’s essential to consider your overall financial situation and goals. You may benefit more from other investment or wealth management opportunities.

For example, if you have a high-risk tolerance and are comfortable investing in stocks or other volatile assets, you might achieve a higher rate of return than by rolling over your 529 plan funds.

Additionally, if you’ve already reached your retirement savings goals and are looking for ways to grow your wealth, there may be more suitable investment options available to you. It’s crucial to carefully evaluate all your options and consult a financial advisor to determine the best course of action for your specific circumstances.

How to Roll Over a 529 Plan to a Roth IRA

If you’re ready to use your 529 plan funds, follow the steps below to properly roll them over to your Roth IRA.

Prepare necessary documentation

The IRS will ask for the following requirements:

  • Roth IRA Rollover Request Form (Form 310) – The version of this form varies by 529 plan provider, so check with them for the correct one.
  • Proof of eligibility – This documentation verifies that the 529 plan is at least 15 years old and that the person who owns the 529 plan also owns the Roth IRA.
  • IRS Form 1099-Q – Once the rollover is processed, the 529 plan provider will issue this form. It reports the distribution and is essential for tax purposes.
  • Notarized signatures – Some providers may require the rollover request form to be signed and notarized. Be sure to check the specific requirements of your 529 plan.

Having these documents ready will streamline the process and ensure you have everything you need for a smooth transition.

Contact your 529 plan provider

Inform your 529 plan provider of your intention to roll over funds to a Roth IRA. They can provide specific instructions and forms required for the rollover. They will also confirm whether your account meets the eligibility criteria for the rollover.

Fill out and submit pertinent paperwork

Complete the necessary paperwork provided by both your 529 plan provider and Roth IRA custodian. This typically includes a rollover request form and possibly a transfer authorization form. Ensure all information is accurate to avoid delays or errors in processing.

Confirm the transfer of funds from the 529 plan to the Roth IRA

After submitting the paperwork, confirm with your 529 plan provider and Roth IRA custodian that the rollover has been completed and the funds are now in your Roth IRA account.

Seek advice from a tax professional to ensure compliance

Consult a tax professional to ensure the rollover complies with IRS rules and regulations. They can guide you on the specific requirements for your situation, including any income tax implications, potential penalties, and additional necessary steps.

They can also help you understand the benefits of rolling your 529 plan to a Roth IRA and advise you on the best strategy based on your financial goals and status.

Tencap is Here to Help

Rolling over a 529 plan to a Roth IRA is a great way to save on taxes, increase your wealth in retirement, and give you more flexibility with your money. However, it’s not a one-size-fits-all solution, and the process can be tricky. It’s important to know if this strategy fits your retirement goals and how to do it correctly.

If you’re unsure whether this strategy is right for you or need help navigating the rollover process, don’t hesitate to seek professional guidance. We at Tencap Wealth Coaching are ready to guide you through your options and help you create a retirement plan that works for you. 

Explore our website to learn more and schedule a consultation today.

The information contained herein should in no way be construed or interpreted as a solicitation to sell or offer to sell advisory services to any residents of any State other than the State of Utah or where otherwise legally permitted. All content is for information purposes only. It is not intended to provide any tax or legal advice or provide the basis for any financial decisions. Nor is it intended to be a projection of current or future performance or indication of future results. Moreover, this material has been derived from sources believed to be reliable but is not guaranteed as to accuracy and completeness and does not purport to be a complete analysis of the materials discussed. Purchases are subject to suitability. This requires a review of an investor’s objective, risk tolerance, and time horizons. Investing always involves risk and possible loss of capital.

Joe Griffin Standing
Joe Griffin
CEO Tencap Wealth Coaching |  + posts

Joe has been building and managing financial planning firms for the past 14 years. He loves the financial planning space and is very proud of the success and growth that has come from his proprietary marketing and leadership. Joe spent years being involved with the bright minds of the investment committee at Utah’s 529 college savings plan – a plan managing over 20 billion. Joe only works with firms that are stated fiduciaries on a client relationship. Joe is committed to leading a financial planning firm with ethics and integrity.  The money management philosophy that Tencap subscribes to is built on strong academics and is supported by a highly impressive academic board. We can't wait to coach you on the excellence that Tencap stands for.

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