The 529-to-Roth IRA rollover option became available on January 1, 2024, as part of the SECURE 2.0 Act, which was approved by Congress in late 2022 to enhance Americans’ abilities to save for retirement.

One of the law’s many provisions aims to help families facing a couple common scenarios. One involves a college student graduating with unused funds left over in a 529 account that was set up when the grad was a child. Under another scenario, if a child doesn’t end up attending college, families have a new Roth IRA rollover option to consider for unused funds in the child’s 529 account. Within the restrictions described below, the provision allows any such remaining funds to be rolled over into a Roth IRA free of federal taxes (note that the provision doesn’t apply to traditional IRAs, just Roth IRAs).

Money that’s rolled over may be used to quickly get beneficiaries on the path to saving for retirement, whether they’ve graduated from college or not. This option is the latest in a series of enhancements that have made 529 accounts increasingly flexible tools to build up future generations’ education savings while also potentially opening up new tax-efficient avenues for estate planning, gifting, and retirement savings.¹

Diving deep into the rules of 529-to-Roth IRA rollovers

Now, more than a year after the rollover option took effect, details are still lacking as to how the new rules apply to a handful of scenarios that aren’t uncommon. State officials who oversee 529 plans, plan managers, and others have sought more detailed guidance, asking the IRS to clarify its interpretation of the rules and how they apply to unique circumstances. In the meantime, Congress hasn’t yet enacted new legislation to provide clarification or corrections. As a result, several key questions remain largely unresolved as of this writing, with no clear timeline for any resolution.

Here are five basic features of the rollover option that can serve as a baseline before getting into the details:

1       Who can receive the leftover assets that are rolled over from a 529 account? Rollovers can be made to a Roth IRA that’s been opened for the beneficiary of the 529 account, with that beneficiary listed as the Roth IRA’s owner. (See the bottom of this article for specifics on how these transactions may be initiated.) It’s not permitted to roll over such funds into a Roth IRA owned by the 529 account owner—typically a parent or grandparent.

2       How long do you have to own the 529 account? While there’s uncertainty about specific circumstances as described further below in this article, the 529 account generally must have been open and in the beneficiary’s name for more than 15 years and the eligible rollover amount must have been in the 529 account for at least 5 years (including contributions and earnings).

3       How much can be rolled over? Rollovers are capped at the annual maximum for Roth IRAs, which for 2025 is $7,000 for those under 50 and $8,000 for those 50 and older, with an aggregate lifetime limit of $35,000. As a result, rolling over leftover funds may take several years. These dollar limits also depend on the beneficiary’s income earned and IRA contributions made; for example, if your beneficiary has already contributed $3,000 to a Roth IRA, the maximum that someone under 50 could roll over that year is $4,000.

4       Does the beneficiary need a job or need to have already contributed to the Roth IRA? The beneficiary must have earned income that at least equals the amount to be rolled over. For example, if you’re planning on rolling over $5,000 in 2025, your beneficiary must have earned at least $5,000 for the year.

5       What if the beneficiary makes too much to contribute to a Roth IRA? There’s no earned income limit for these transfers, as 529-to-Roth IRA rollovers aren’t subject to typical income limits that apply to Roth IRA contributions. Normally, you can’t contribute if your modified adjusted gross income in 2025 exceeds $165,000 for single filers or $246,000 for those who are married and filing jointly.

As with any such change in the law, it's advisable for 529 account owners to consult a financial professional for specific guidance, especially to get up to speed on the latest details on how rollover rules apply to individual circumstances. Here’s a look at key unresolved issues.

·       How might the 15-year minimum requirement for 529-to-Roth IRA rollovers be interpreted in cases in which the account beneficiary was changed during that period? Does the 15-year clock start over when a beneficiary changes? The most common scenario involves a parent establishing a 529 account for one child before switching the beneficiary to another child years later as circumstances change, such as the original beneficiary deciding not to attend college. Although such changes can be made without penalty provided the new beneficiary is another eligible family member, it remains unclear whether such a change restarts the 15-year clock for Roth IRA rollover eligibility.

·       Does the clock for the 15-year requirement start over if a 529 account owner rolls over funds to another state’s 529 plan run by a different plan manager? It’s unclear. Circumstances under which a 529 account owner may wish to consider such a rollover include dissatisfaction with the plan’s fees, investment performance, or services or instances in which an owner consolidates multiple 529 accounts into a single 529 plan rather than keeping them spread across different plans.

·       What are the IRS reporting requirements for a transfer from a 529 account into a Roth IRA that occurs before April 15, 2025―the fast-approaching federal tax deadline for submitting returns covering income earned in 2024? You’ve got until this year’s Tax Day to make a 2024 contribution. According to the latest IRS guidance, “a distribution made after December 31, 2024, and before April 15, 2025, that is rolled over to a Roth IRA by April 15, 2025, and designated for 2024 would be reported as a Roth IRA contribution for 2024.” For reporting purposes, the current IRS Form 5498 on IRA contributions contains a Box 10 labeled, “Roth IRA contributions.” (Note: The IRS in April 2025 also updated its Form 1099-Q, which 529 programs use to report distributions. The IRS states on the updated form that Box 4 “now has two checkboxes, 4a to report trustee-to-trustee transfers and 4b to report a QTP (qualified tuition program) to a Roth IRA transfer.”)

·       For tax purposes, when can a withdrawal from a 529 account made for purposes of a rollover into a Roth IRA be treated as a tax-free contribution rather than as a taxable withdrawal? From a federal tax perspective, if the key conditions specified above covering 529-to-Roth IRA rollovers have been met, the rollover can be made without incurring the 10% tax penalty normally associated with other types of distributions or withdrawals that are considered taxable. (The IRS further states, “Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040, 1040-SR, or 1040-NR. These aren't taxable distributions.”)

However, it’s more complicated when it comes to state taxes, as not all states currently treat distributions from 529-to-Roth IRA rollovers as qualified expenses for state income tax purposes. Qualified refers to 529 account withdrawals made to cover eligible expenses such as tuition and other education-related expenses at eligible post-secondary or eligible private elementary or secondary schools. For tax-related information from a specific state, state 529 plans publish rules on their websites. In addition, a state-by-state guide on tax treatment and qualified expenses is published by savingforcollege.com. Most states’ plans conform with the federal definition of qualified education expenses, and distributions from a 529 account directly to a Roth IRA are considered a qualified expense for state tax purposes. Among the notable exceptions that currently don’t consider such distributions as state tax free are California, Illinois, and Michigan; however, some states have recently changed policy and aligned with federal tax rules by extending state tax-free treatment.

Making a 529-to-Roth IRA rollover

If it’s appropriate to roll over leftover funds, it’s a good idea to check with a financial professional before opening a Roth IRA for the 529 account beneficiary and making the conversion. To help ensure the transaction is federal tax free, the IRS provides guidance stating, "The rollover must be paid through a direct trustee-to-trustee transfer to a Roth IRA maintained for the benefit of the beneficiary." In contrast, an account owner could end up paying federal taxes and a penalty for an unqualified withdrawal if funds are withdrawn from the 529 account and subsequently contributed to the Roth IRA.

Don’t let the uncertainty lead to a missed opportunity

Even with all the lingering uncertainty about specific rules, 529-to-Roth IRA rollovers offer greater financial flexibility to many families with college-bound children. For those parents or grandparents who started contributing to a 529 account when a child was young, rollovers could be a great way to keep contributing to a loved one’s financial needs well beyond college. Please consult your tax professional for more information.

1 State gift, estate tax, and tax laws and treatment may vary. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty tax. Earnings on nonqualified distributions will be subject to income tax and a 10% federal penalty tax. Please consult your tax professional for more information.