Perhaps you’ve heard of a new law that went into effect in 2024 that now allows 529 account holders to use up to $35,000 to fund their Roth IRA, within certain parameters. Here’s the skinny on how the rule works.
1. Rollovers from a 529 to a Roth IRA are in lieu of other Roth IRA contributions for the year of the rollover.
This means that there is a limit on how much can be rolled over each year, up to the statutory contribution limit for the tax year, and that these rollovers are done INSTEAD of new contributions to a Roth IRA. For 2025, that limit is $7,000 unless you’re age 50 or older, then it’s $8,000.
2. Income limits do not apply for Roth IRA rollovers from 529 accounts.
You may know that direct Roth IRA contributions are limited to folks whose income is below the annual limits, but since this is a rollover, those limits don’t apply. This is one reason that this rule has become colloquially known as the “backdoor 529 Roth.”
3. You do need to have earned income to make the rollover, however.
While a beneficiary wouldn’t be limited by making TOO much money, they do need earned income at least equivalent to the amount that they are rolling over to their Roth IRA. In other words, this is not a strategy for retired people nor for students still enrolled in college full-time with no earned income. (investment and retirement income do not count)
4. There’s a lifetime limit of $35,000 per person.
For people who have more than $35,000 left in their 529 upon completing their education, the rollover to a Roth IRA is only a partial solution. Once a total of $35,000 is rolled to a Roth IRA, other options for any remaining funds include:
Transferring the funds to another member of the beneficiary’s family (including future children and grandchildren, siblings, cousins, etc.)
Withdrawing up to $10,000 to pay toward qualified education loans for the beneficiary or their siblings
Or simply withdrawing the remaining funds and paying taxes plus a 10% on any allocated earnings (Note that the entire distribution wouldn’t be taxed and penalized, just any growth of the funds since they were contributed, although there may be additional state income tax consequences if you took a deduction for contributions)
5. The beneficiary must have had a 529 for at least 15 years.
To be honest, this is an area of the law that is the most confusing while we wait for the IRS to hopefully issue clarifications sooner than later. The actual text of the law, which is technically Sec. 126 of the SECURE 2.0 Act, says this: …”a distribution from a qualified tuition program of a designated beneficiary which has been maintained for the 15-year period ending on the date of such distribution…” TBD on whether that means the beneficiary has to have been a beneficiary for 15 years or if just the account has to have been open or something else.
6. Any funds contributed within 5 years of the distribution are not eligible for rollover, at least until 5 years has passed.
Basically, the law is written so that those of us who make too much money to contribute to a Roth IRA don’t all run out an open 529 accounts and just make the contributions that way. So not only do you need to have had a 529 for at least 15 years, you also can’t roll over any money that went into the account in the past 5 years, making this strategy truly best only for funds that were over-contributed for the purpose of funding education and not a work-around for Roth IRA contribution eligibility rules.
The big question everyone is asking
The big unanswered question here is what happens if a person had a 529 account with leftover funds, then they transferred those to a family member before they were aware of this rule. If that family member transfers the money back, does that re-start the 15-year clock? Or does the fact that the account was opened for over 15 years and the original contribution made over 5 years ago satisfy this rule?
Only the IRS can say for sure, although there are plenty of opinions and viewpoints out there. For us at The Prosperity People, we prefer to wait for official guidance in these gray areas.
A few other nuances to know
First, a 529 to Roth rollover must be done as a direct, trustee-to-trustee transfer. That means you would contact the 529 plan administrator and request the rollover directly to the Roth IRA custodian. Skipping this administrative hassle and doing the transfer yourself is likely to result in a nonqualified 529 distribution and could also lead to an ineligible Roth IRA contribution if the account owner’s income is above the statutory limits.
The other thing to know is that any funds that are rolled over to Roth IRA have a 5-year waiting period before they can be considered a “qualified distribution,” regardless of the age of the account holder. This includes cases where the Roth holder is withdrawing “basis” of their Roth, which you can do at any point, regardless of age or time passed, with funds that are contributed directly to a Roth IRA. But when those funds are put into the Roth from a conversion or rollover from a 529, there’s a 5-year waiting period before those funds are considered basis.
The bottom line is that this new rule can help alleviate some of the concern about over-funding a 529 account, particularly for families who wish to get started early in a child’s life, but are unsure how much education funding that child will eventually need. Knowing that even if they earn a full scholarship, choose a school that’s not qualified for 529 distributions or decide for forgo college altogether that at least some of those funds can be used to secure their future retirement makes it a little easier to get that account opened and funded as soon as you receive the good news that a new bundle of joy has arrived!
For help with other education planning strategies, we’re here for you! Schedule a chat and let’s talk about how we can help.