One of the more exciting provisions of the SECURE 2.0 Act, signed into law December 2022, is the tax-free rollover from a 529 educational savings account into a Roth IRA. This provision became effective in 2024 and will help to reduce or eliminate the problem of having unused funds in a 529 account.

For the most part, this provision is exactly as advertised. It allows for leftover funds in a 529 account to be rolled over into a Roth IRA in the name of the 529 account beneficiary.

Let’s dive into the details.

  • As noted above, this provision is now effective for the 2024 tax year.
  • There is a lifetime limit of $35,000 per beneficiary and the Roth IRA must be in the name of the beneficiary of the 529 account.
  • The annual Roth IRA contribution limits are in play and both Roth IRA contributions of the beneficiary plus 529 rollovers into the beneficiary’s account must be aggregated.
    • For 2024, this is $7,000 plus an additional $1,000 for those age 50 and older.
  • The income limitations to contribute to a Roth IRA are not in play and therefore, even if the beneficiary makes too much to contribute to a Roth IRA, you can still complete a rollover from a 529 account to a Roth IRA account in their name.
  • The beneficiary must have earned income that is at least the amount that you want to rollover.
  • The 529 account must have been open for at least 15 years at the time of the rollover and contributions and earnings within the last 5 years don’t qualify.
  • The rollover must be a direct plan-to-plan rollover, which means you cannot take a distribution from the 529 plan and then write a check to the Roth IRA account.

This provision opens doors for new tax planning opportunities. We recommend consulting with your KT tax professional before beginning the process.