My oldest son just graduated from college. My youngest is a sophomore. For almost 30 years, like many of you, I’ve diligently put money into my kids 529 plans. As a financial planne I helped hundreds of clients do the same, from the day their child was born to the day they wrote their last tuition check.
And for years, we all shared the same nagging fear: what happens if we saved too much for college? What do we do with the unused 529 funds without getting hit by a massive tax and penalty bill?
Then came the SECURE Act 2.0. When I first read Section 126of the act, I knew it was a game-changer. It created a legal, tax-free way to roll over that leftover 529 money into a Roth IRA.
As a planner and a father, I dove into the research for my clients and for my own family. This guide is the result. A definitive look at the rules, the “gotchas,” and the incredible opportunity this presents for 2025 and 2026.
Key Takeaways Ahead
The Core Opportunity: Why This 529 to Roth Rollover is a Financial Game-Changer
In simple terms, this new rule allows you to move money from a tax-advantaged education account (the 529 Plans) directly into a powerful, tax-advantaged retirement account (a Roth IRA) for the same beneficiary, without paying federal income tax or penalties on the transfer.
Think of it like a financial relay race. You, the parent or grandparent, have run the first leg by saving diligently. Now, you can pass the baton of those savings to your child or grandchild, giving them a massive head start in their own race toward a tax-free retirement.
It’s one of the most effective tools for intergenerational wealth transfer I’ve ever seen.
💡 Michael Ryan Money Tip
This isn’t just about avoiding a penalty; it’s about transforming education savings into a multi-decade, tax-free compounding machine. A one-time $35,000 rollover for a 22-year-old could grow to over $449,000 by age 65, assuming a 7% annual return—all completely tax-free.
For more about 529 Plans I would strongly suggest you read a recent article I published that will go over everything you want to know about 529 Plans. Also consider reading my article comparing prepaid tuition to a 529 plan.
The Official Rulebook: 529 Roth Rollover Eligibility and Limits for 2025 & 2026
This isn’t a free-for-all. The IRS has put strict guardrails in place. To do this correctly, you have to know the rules inside and out. The infographic below does a great job explaining the rules for you
Rule #1: The 15-Year Account Age Requirement
The 529 plan must have been open for a minimum of 15 years before you can execute a rollover of 529 funds to a Roth IRA
- Why it exists:
This prevents people from opening a 529 plan as a quick “backdoor” to fund a Roth IRA. Reinforcing its primary purpose as a long-term education savings tool. - The Big Question (IRS Ambiguity):
What if you changed the beneficiary on the account? Does the 15-year clock restart? The IRS has not yet provided definitive guidance on this.
My conservative advice: To be safe, assume the 15-year clock applies to both the account’s age and how long the current beneficiary has been named. Consult a tax professional if you have changed beneficiaries.
Rule #2: The 5-Year Contribution “Seasoning” Rule
Any contributions made to the 529 plan within the last five years (and the earnings on those contributions) are ineligible for a tax-free rollover.
- Example:
You opened a 529 for your son 16 years ago. You made a contribution last year. You can roll over funds from your earlier contributions, but the money you put in last year must wait another four years before it’s eligible.
Rule #3: The Beneficiary’s Earned Income Requirement
The beneficiary of the 529 plan (who must also be the owner of the Roth IRA) must have includible compensation (earned income) that is at least equal to the amount of the rollover for that year.
For example: To rollover $35,000 from unused 529 Plan funds to a Roth IRA, your child will need to have $35,000 or more in income.
🔍 Explained Simply
“Includible compensation” is money earned from a job, like wages on a W-2, salaries, tips, or self-employment income. It doesn’t include passive income from investments or unemployment benefits. For a recent grad, a part-time or summer job absolutely counts toward this requirement.
Rule #4: The Annual and Lifetime Rollover Limits
There are two hard caps you must follow:
- The Annual Limit:
The amount you roll over in a single year cannot exceed the annual Roth IRA contribution limit for that year. For 2025, that limit is $7,000 for individuals under 50.
This rollover counts toward that annual limit. You cannot roll over $7,000 and contribute another $7,000. - The Lifetime Limit:
There is a lifetime maximum of $35,000 that can be rolled over per beneficiary.
⚠️ Critical Warning
If you have one 529 account for multiple children, the $35,000 lifetime limit still applies *per beneficiary*, and you likely cannot roll over $35,000 for each child from that single account. This is a key reason I have always advised clients to open separate 529 accounts for each child to maximize flexibility and avoid this exact limitation.
Rule #5: The High-Income Earner Advantage
Here’s the best part.
While regular Roth IRA contributions are restricted by income limits, the 529 to Roth IRA rollover has no income limitation for the beneficiary.
This is a massive planning opportunity. A high-earning doctor or lawyer who is phased out of contributing to a Roth IRA directly can still receive up to $35,000 into their Roth IRA via this method.
The Four Step-by-Step 529 Rollover Process
Knowing the rules is one thing. Executing the transfer is another. Here’s how to do it correctly.
Step 1: Open a Roth IRA for the 529 Plan’s Beneficiary.
The 529 beneficiary must open a Roth IRA in their own name at a financial custodian (like Fidelity, Vanguard, or Schwab).
Step 2: Initiate a Direct, Trustee-to-Trustee529 Plan Transfer.
Contact your 529 plan administrator and specifically request a “direct rollover to a Roth IRA.” The funds must move directly from the 529 provider to the Roth IRA provider.
Do not have them send you a check. Withdrawing the money yourself first will likely trigger taxes and penalties, voiding the entire benefit.
Step 3: Coordinate with Both Financial Institutions.
Provide the 529 administrator with the new Roth IRA account number and any required paperwork.
It’s also wise to notify the Roth IRA custodian that funds are incoming to ensure a smooth process.
Step 4: Report The 529 Plan Roth Rollover Correctly on Your Taxes.
Even though it’s tax-free, the transaction must be reported. Y
ou will receive a Form 1099-Q from the 529 plan showing the distribution. Your Roth IRA custodian will issue a Form 5498 showing the rollover contribution.
These forms are how you prove to the IRS that you performed a legitimate, qualified 529 to Roth IRA rollover.
📉 Bad Advice
The worst thing you can do is withdraw the 529 funds to your own bank account first. This is considered a non-qualified distribution and will likely trigger income tax and a 10% penalty on the earnings. Always insist on a direct, trustee-to-trustee transfer to protect the tax-free status of the rollover.
Advanced College Savings Considerations & Potential Pitfalls
Here’s two more considerations for you as well
State Tax Implications: The “Recapture” Risk
While the rollover is tax-free at the federal level, your state’s tax treatment may vary.
Some states, like California, may “recapture” previously claimed state income tax deductions on the rolled-over amount, meaning you might have to pay back that tax benefit.
It is crucial to check with your state’s 529 plan administrator or a tax professional.
🤔 Things to Ponder
Did your state give you a tax deduction for your 529 contributions? If so, you must investigate its “recapture” rules before acting. Don’t assume a federally tax-free transaction is also state tax-free, as this oversight could lead to an unexpected and frustrating state tax bill.
FAFSA & Financial Aid Impact
A key benefit of this strategy is its favorable treatment on the FAFSA (Free Application for Federal Student Aid).
Roth IRAs owned by a student are not currently considered a reportable asset, meaning the rolled-over funds should not negatively impact their eligibility for financial aid in the future.
Beyond the Rollover: Other Smart Uses for Leftover 529 Funds
This new rule is fantastic, but it’s not your only option. For a full comparison, you should read my guide comparing prepaid tuition to a 529 plan.
Comparison of Strategic 529 Plan Options
| Option | Key Benefit | Key Limitation | Best Use Case |
|---|---|---|---|
| Roth IRA Rollover | Tax-free growth & withdrawals in retirement; bypasses Roth income limits. | Subject to 15-year, 5-year, annual, and lifetime ($35k) limits. | Overfunded 529 for a beneficiary with earned income. |
| Change Beneficiary | Funds continue tax-free growth for another eligible family member. | Potential 15-year rule uncertainty. | Multiple children/grandchildren or owner pursuing education. |
| Student Loan Repayment | Tax-free repayment of up to $10,000 in qualifying student loans. | Lifetime limit of $10,000 per beneficiary. | Beneficiary has outstanding student loan debt. |
| Fund an ABLE Account | For beneficiaries with a qualifying disability, funds can be rolled over to another powerful tax-advantaged savings vehicle. | Subject to ABLE account rules and contribution limits. | Beneficiary has a disability and is eligible for an ABLE account. |
Your Action Plan: 529 Plan Next Steps
The opportunity presented by the SECURE 2.0 Act is too valuable to ignore. If you have an overfunded 529 plan, now is the time to act.
🚀 Your Action Plan:
- Verify Your Account’s Age: Check your statements to confirm your 529 account is over 15 years old.
- Confirm the Beneficiary’s Income: Ensure the beneficiary has enough earned income for the tax year you plan to make the rollover.
- Contact Your 529 Administrator: Ask about their specific process and forms for a “direct trustee-to-trustee rollover to a Roth IRA.”
- Open the Roth IRA: Have the beneficiary open their Roth IRA account so it’s ready to receive the funds.
- Consult a Professional: Before you initiate the transfer, a quick call with your financial advisor or tax professional can confirm any state-specific tax implications and ensure this strategy aligns with your family’s broader estate planning goals.
