Beginning in 2024 excess funds held in a 529 college savings plan will be eligible to be rolled over to a Roth IRA for the beneficiary.  

For families who contributed to 529 college savings plans for their children and did not fully exhaust the accounts while paying for qualified education expenses, there is a new alternative for the remaining funds.  Beginning in 2024, taxpayers can begin to “take a tax-free distribution in the form of a Roth Conversion” and the remaining 529 funds be moved to the Roth as a trustee-to-trustee transfer. The 529 owner can’t take a distribution from the account and then subsequently contribute that money to a Roth IRA for the 529 beneficiary.

Prior to the coming rule change, withdrawals made from the 529 plan not used for qualified education expenses resulted in taxpayers being assessed income taxes plus a 10% penalty on the earnings portion of the distribution from the plan.

This new law change comes with a few requirements that taxpayers need to be aware of.

  1. There is a $35,000 lifetime cap on the total amount of transfers.
  2. The beneficiary’s 529 plan must have been open for at least 15 years
  3. 529 plan contributions (and associated earnings) made in the prior five years are not eligible to be rolled over.
  4. Each year the maximum allowed transfer from the 529 plan to a Roth IRA is capped at the annual Roth IRA contribution limit and subject to Roth contribution rules such as meeting the earned income requirement and the phase-out for higher income earners.
  5. The transfer must be to the beneficiary’s Roth IRA and not to the parent’s Roth IRA.

With proper planning and familiarity with these qualifying rules, this new taxpayer friendly rule will allow the accumulated earnings on unused 529 plans to continue to grow tax-free for your child or other beneficiary within a Roth IRA over his or her lifetime.