Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / How to Roll Over 529 Plan Funds to a Roth IRA
Transcript
- Lucas: So you've been diligently saving in a 529 plan for years, maybe decades. Your kid graduates, and there's money left over. Historically your options were limited: change the beneficiary to another family member, or withdraw the money and pay income tax plus a 10 percent penalty on the earnings. Luna: Right, that penalty stings. But I know the SECURE 2.0 Act created a third option. Lucas: Exactly. Starting in 2024, you can roll over up to thirty-five thousand dollars from a 529 plan into a Roth IRA for the beneficiary. No tax, no penalty. It's a massive shift in how we think about over-saving. Luna: Thirty-five thousand is a meaningful chunk. But there are hoops, right? Lucas: There are several, and they matter. First, the 529 account must have been open for at least 15 years. So if you opened one the year your child was born, it qualifies by the time they're 15. But if you opened it later, you have to wait. Luna: Okay, so the clock starts when the account is opened, not when contributions are made. Lucas: Correct. And contributions made in the last five years cannot be rolled over. So if you added money when your kid was a junior in high school, that chunk has to stay put for five years before it's eligible. Luna: That prevents people from parking money just to immediately move it into a Roth. Lucas: Right. And the rollover is subject to the annual Roth IRA contribution limits. For 2026, that's seven thousand dollars for someone under 50. So you can't just move thirty-five thousand in one shot. You'd spread it over several years. Luna: So the beneficiary also needs earned income? Because to contribute to a Roth, you need compensation. Lucas: Great question. The rollover counts as a contribution for the beneficiary, so they need at least that much in earned income in the year of the rollover. But if they're a recent grad with a job, that's usually fine. If they don't have income, the rollover can't happen that year. Luna: That's a real constraint. Let's walk through a concrete example. Lucas: Sure. Say your daughter graduated with a four-year degree, and you have forty thousand dollars left in the 529. The account was opened 18 years ago, so the 15-year rule is satisfied. You've made no contributions in the last five years, so all the money is eligible. Luna: She just started a job earning fifty thousand. So she can take the full seven thousand rollover this year. Lucas: Exactly. You roll over seven thousand this year, seven thousand next year, and two thousand the year after that—assuming the limit stays the same. That moves sixteen thousand tax-free. The remaining twenty-four thousand? You could change the beneficiary to another child, or withdraw and pay tax and penalty on the earnings. Luna: But the rollover only applies to the beneficiary, not the account owner. So if you're a grandparent who owns the 529, you can't roll it into your own Roth. Lucas: Right. The rollover is for the designated beneficiary only. Grandparents should keep that in mind when deciding who owns the account. Luna: It still gives families a lot more confidence to save aggressively. The old fear was 'what if we over-save?' Now you have a safety valve. Lucas: Exactly. And it's not just for leftover funds. Some families might intentionally save more knowing they can redirect up to thirty-five thousand into retirement. It changes the whole calculus. Luna: But there's a lifetime cap of thirty-five thousand total per beneficiary from all 529 plans combined? Lucas: Correct. That's a total limit, not per account. And once you hit that cap, no more rollovers from any 529 for that person. Luna: And what about the tax forms? Is it reported as a contribution? Lucas: The 529 plan will issue a Form 1099-Q, and the Roth IRA custodian will report the rollover as a contribution. The beneficiary's tax software should handle it, but it's worth consulting a professional the first year. Luna: I've heard some people worry that this could be changed by future legislation. Is it here to stay? Lucas: It's in the tax code. Could Congress repeal it? Possibly, but SECURE 2.0 had broad bipartisan support. For now, it's law, and families should take advantage. Luna: One more nuance: if the beneficiary already has a Roth IRA from a previous job, does that affect anything? Lucas: No, the rollover is independent. It just adds to their annual contribution limit. So if they're already contributing six thousand from their paycheck, they can still roll over seven thousand from the 529 as long as they have enough earned income to cover the total. Luna: That's generous. So the key takeaway: if your 529 is at least 15 years old and you haven't added money in the last five years, you can start moving funds into a Roth IRA for the beneficiary, up to seven thousand a year, capped at thirty-five thousand lifetime. Lucas: Exactly. And honestly, it's this kind of detailed planning that we try to bring every week. Quick honest thing — a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds us making episodes like this. So if our conversations have helped you think about your savings strategy differently, that's the place. Luna: Yeah, it really does make a difference. Even a few dollars a month helps us keep the podcast ad-free and focused on topics like this. Lucas: So back to the rollover — if you're sitting on a 529 with a balance after your kid finishes school, don't just assume you have to take the penalty. Check the dates, check the earned income, and consider moving some into a Roth. It's a win for your child's long-term financial health. Luna: And if they don't have earned income yet? Maybe they're in grad school? The clock ticks. The 529 age keeps going. Lucas: Right. The account continues to age even if no rollover happens. Once they have income, you can start the transfers. The 15-year requirement is about the account, not the beneficiary's age. Luna: So this really encourages people to open 529s early, even if they're small. Just to start the 15-year clock. Lucas: Absolutely. Even a hundred dollars opened today means that by 2041, those funds are eligible for rollover. It's a long-term play. Luna: One last thing: what about state tax deductions? If you deducted those contributions on your state return, does the rollover trigger recapture? Lucas: That depends on your state. Some states, like New York and California, have said they will treat the rollover as a non-qualified withdrawal for state purposes, meaning you may have to recapture the state tax benefit. Others, like Illinois, have conformed to the federal treatment. You definitely need to check your state's rules before pulling the trigger. Luna: So the federal tax treatment is favorable, but state treatment varies. Got it. Lucas: And if you live in a state with no income tax, that's one less worry. But for everyone else, a quick call to your plan provider or a tax pro is worth the time. Luna: All right, so the Roth rollover is a powerful tool, but it's not automatic. You have to plan for it. Lucas: Exactly. And with that, we'll leave you with this: if you've been on the fence about how much to save in a 529, the Roth rollover option gives you more freedom. The worst case isn't a penalty anymore — it's a head start on retirement.