Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / 529 to Roth IRA Rollover The Fine Print You Might Miss
Transcript
- Lucas: If you've got a 529 plan that's sitting with a balance after your kid finishes college, there's a question a lot of people are asking now: can that money move into a Roth IRA? Luna: And the answer is yes, but I've heard the rules are pretty specific. The SECURE Act 2.0 made it possible, but not exactly straightforward. Lucas: Exactly. As of 2024, you can roll over up to thirty-five thousand dollars from a 529 plan to a Roth IRA for the same beneficiary. No penalty, no income tax on the conversion. But there are four big conditions that trip people up. Luna: Let's hear them. I know the fifteen-year rule is one. Lucas: Right. Condition one: the 529 account must have been open for at least fifteen years before you can do a rollover to a Roth IRA. That clock starts when the account was first opened — not when contributions were made. So if you started a 529 when your child was born, that's great. But if you opened it when they were ten, you'd have to wait until they're twenty-five to roll anything over. Luna: What if you change the beneficiary? Does the clock reset? Lucas: It does — partially. If you change the beneficiary to another family member, the fifteen-year clock restarts for the new beneficiary. But contributions made before the change can still count toward the original beneficiary's fifteen-year window. It gets messy. The IRS hasn't issued final regulations yet, so the safest path is to keep the same beneficiary for the full fifteen years. Luna: Okay, so condition one is the fifteen-year holding period. What's condition two? Lucas: Condition two: the rollover counts toward the beneficiary's annual Roth IRA contribution limit. For 2026, that limit is seven thousand dollars, or eight thousand if they're fifty or older. So you can't just dump thirty-five thousand in one year. You'd have to spread it out over several years — up to the annual limit each year, and only up to the total lifetime cap of thirty-five thousand. Luna: That means if your graduate has no earned income, they can't contribute at all. Roth IRAs require earned income — wages, salary, self-employment income. Lucas: Exactly, that's condition three. The beneficiary must have enough earned income to cover the rollover amount in the year of the rollover. So if your recent grad is job-hunting and earns nothing in a given year, you can't do a rollover that year. The rollover is treated like a regular Roth IRA contribution for the earned-income test. Luna: So a typical scenario: your kid finishes a four-year degree at twenty-two, has thirty thousand left in the 529. The account was opened when they were five, so the fifteen-year clock is fine. But they need to have a job that pays at least seven thousand dollars in a year to move seven grand into a Roth IRA. Lucas: Right. And condition four: the rollover can't exceed the Roth IRA's income phase-out limits. If the beneficiary's modified adjusted gross income is above the phase-out range for Roth IRA contributions — for 2026, that's roughly one hundred and sixty-one thousand to one hundred and seventy-six thousand for a single filer — they can't contribute directly. But the rollover might still be allowed under a special provision. The safe approach is to keep income below the phase-out. Luna: Is there any way to avoid the earned-income hurdle? Like if a parent is the beneficiary instead? Lucas: That's a workaround some people use. If the parent is the beneficiary of the 529, and they have earned income, they can roll over to their own Roth IRA. But that permanently changes the beneficiary. You'd lose the ability to use those funds for a child's education. It's a trade-off. Luna: Let's walk through a concrete example. Say your child graduates at twenty-two with a thirty-thousand-dollar surplus in a 529 that's been open for eighteen years. They get a job paying forty thousand a year. What's the optimal rollover strategy? Lucas: Great question. In 2026, they can contribute up to seven thousand to a Roth IRA from their own salary. They could also roll over up to seven thousand from the 529 — but the total of salary contributions and rollover can't exceed seven thousand. So if they put in three thousand from their paycheck, they can only roll over four from the 529. To move the full thirty thousand, they'd need five years of rollovers, assuming they max out the yearly limit each year. Luna: And they need earned income each of those years. So they'd have to be working at least part-time throughout. Lucas: Exactly. And remember, the rollover is separate from the fifteen-year clock for distributions used for education. You can still take tax-free withdrawals for qualified expenses at any time. But once you roll over to Roth, that money is locked until retirement — though Roth IRA contributions can be withdrawn anytime without penalty. Luna: One thing I find attractive about this is the ability to avoid the ten-percent penalty on non-qualified 529 withdrawals. Before the SECURE Act, if you had leftover funds, your options were basically change the beneficiary or pay tax plus penalty on the earnings. Lucas: Right. The earnings portion of a non-qualified withdrawal is subject to ordinary income tax plus a ten-percent penalty. The rollover sidesteps that entirely. You move the money into a tax-advantaged retirement account. The only catch is you're limited to the Roth IRA rules from then on. Luna: What if the beneficiary already has a Roth IRA from a previous job? Does that change anything? Lucas: Not really. The thirty-five-thousand-dollar cap is a lifetime limit per beneficiary for 529-to-Roth rollovers. It doesn't interact with other Roth IRA contributions or rollovers from other sources like a 401. But you still have to respect the annual contribution limit across all sources. Luna: Are there any states that tax the rollover? I know some states offer a state income tax deduction for 529 contributions. If you roll over, do you have to recapture that deduction? Lucas: That's a state-by-state issue, and it's still evolving. Most states that offer a deduction for 529 contributions treat the rollover as a non-qualified withdrawal for state purposes. That means you might have to add back the deduction you took in prior years. For example, New York requires recapture if you roll over within a certain period. Check your state's rules before proceeding. Luna: And what about the beneficiary being a minor? Can you roll over a 529 to a Roth IRA for a child under eighteen? Lucas: Technically yes, if the child has earned income. But a minor's earned income is usually limited. Also, the fifteen-year clock would have to have passed. For most families, the beneficiary will be at least in their early twenties before they have enough earned income to make rollovers meaningful. Luna: This feels like a great planning tool for families who have been diligent savers and end up with extra funds. But it's not automatic. You have to coordinate timing, income, and contribution limits. Lucas: Exactly. And that's why we're drilling into it today. A lot of people hear 'you can roll over to a Roth' and think it's a one-time lump-sum transfer. It's not. It's a multi-year strategy that requires your child to have earned income and a Roth IRA that's been open long enough. Luna: You know, Lucas, this is exactly the kind of practical, nuanced conversation that makes our show valuable. I'm glad we can have it without any ads interrupting. Lucas: That's intentional. We don't run ads on these episodes because we want the information to be clear and unsponsored. If you find these deep dives useful and want to support keeping them ad-free, you can find us at buy me a coffee dot com slash fexingo. No pressure — just an option if the show adds value for you. Luna: Totally. And now back to the rollover — one more nuance I want to hit: the ordering rules for 529 distributions. If you take a non-qualified withdrawal, the earnings come out first for tax purposes. But with a rollover, does it matter which dollars you move? Lucas: The IRS treats the rollover as a distribution from the 529, and it's considered a return of contributions first, then earnings. That's actually favorable because the earnings get rolled over tax-free to the Roth. So you don't trigger any income on the earnings portion at the time of the rollover. Luna: Good. So the key takeaway: the 529-to-Roth rollover is a powerful tool, but it requires patience and planning. Fifteen-year account age, earned income, annual limits, and a lifetime cap of thirty-five thousand. Lucas: And it's only available for Roth IRAs — not traditional IRAs. So if your beneficiary prefers a tax deduction now, they're out of luck. Roth is after-tax money, but growth is tax-free. Luna: What about someone who has multiple 529 plans for the same beneficiary? Can you roll over from each? Lucas: The thirty-five-thousand-dollar cap applies per beneficiary, not per account. So if a child has two 529 plans with twenty thousand each, the total rollover across both can't exceed thirty-five thousand. And the fifteen-year clock applies separately to each account? Actually, the IRS has said the fifteen-year rule applies to the account from which the rollover is made. So each account must meet its own fifteen-year age. Luna: That could be a headache for families that switch state plans or consolidate. Lucas: Yes, consolidation could reset the clock. If you roll a 529 from one state to another, the receiving account's age might not include the prior account's history. The proposed regulations are still pending, so check with a tax advisor before moving funds. Luna: So in summary: the SECURE Act opened a door, but it's a narrow door with a few locks. Worth exploring if you have leftover 529 funds and a beneficiary with earned income. Lucas: Absolutely. And it's one of those rare opportunities where you can move money from a college savings account into retirement savings without a tax hit. If you plan it right, it's a double win.