The Law and Strategies to Convert a College 529 to a Roth

Allan RothBeginning this year, the SECURE Act 2.0 allows owners of 529 plans to convert unused 529 funds to the beneficiary’s Roth IRA. But there are some stringent conditions, major ambiguities in the law, and potential income taxes and even penalties. I’ll cover the law and tax implications, my experience converting some of my son’s 529 money to his Roth, and some strategies this new law offers for college and beyond.

The law

This new law has huge benefits for those with large 529 account balances whose children have completed college and have unused funds. Before this year, the owner would have to pay taxes and a penalty to get money out of the account. Now, under certain conditions, the beneficiary can receive this money in a Roth tax-wrapper that, under current law, can grow for decades income tax-free.

Here are the details:

  • The lifetime distribution limit is $35,000 per beneficiary.
  • The maximum annual conversion amount is the IRS maximum for IRAs, currently $7,000 for those under age 50, less any other IRA contributions made that year by the beneficiary.
  • The 529 plan must be open for at least 15 years.
  • The Roth IRA must be in the name of the beneficiary of the 529. That beneficiary must have earned income at least as much as the rollover amount. Unlike a direct Roth contribution, the income limit does not apply to these Roth conversions.
  • The rollover must be a direct rollover from the 529 plan to the Roth IRA custodian (trustee to trustee). The owner or beneficiary cannot take a check – no 60-day rule.
  • Contributions and earnings on those contributions made in the last five years cannot be converted to a Roth.