Roth IRAs from 529 Plans

What happens when a 529 plan has been overfunded, so that funds are still in the account when the beneficiary’s college education is complete?  If the surplus is removed for other than qualified education expenses, there will an income tax on earnings and a 10% penalty tax.  The SECURE Act 2.0 provides an alternative resolution. Subject to some pretty serious limitations, up to $35,000 of the excess savings may be rolled into a Roth IRA for the beneficiary.

 

Among the limitations:

            • the 529 account must have been in existence for at least 15 years before the rollover;

            • contributions and their earnings from the five years before the rollover may not be included in the rollover;

            • beneficiary must have earned income as great as the rollover amount in the year of the rollover;

            • ordinary Roth IRA contribution limits apply;

            • the rollover must be a trustee-to-trustee transfer; and

            • funds cannot revert to the owner of the account.

 

            Possible work-around?  The Retirement Learning Center has pointed out that a parent who is the 529 account owner for his or her child may be eligible to become a successor beneficiary as a qualified family member.  As such, the parent might be able to move the money into his or her own Roth IRA eventually.  However, the open question is whether the change of beneficiary would start a new 15-year waiting period before the rollover could happen.  See generally https://www.psca.org/news/psca-news/2025/9/how-does-converting-a-529-to-a-roth-ira-work/ for more information.

           

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