Over the years, you have been contributing to your 529 college savings plan, and now you may find that there is some leftover funds in it. Perhaps your grandchildren graduated early, or they received more scholarships than expected, or they decided not to pursue higher education. Now, a federal regulation allows you to transfer this remaining fund into a Roth individual retirement account (IRA) without paying taxes. This may sound too good to be true, but for some account holders, it is not as rosy as it seems.
The regulation does exist, but the eligibility criteria are quite stringent, and several states have set up a “tax trap” that many account holders may not have anticipated.
Under Section 126 of the SECURE 2.0 Act, you can transfer unused 529 funds to a Roth IRA without incurring income tax or penalties, with a lifetime cumulative transfer limit of $35,000 per person. However, the 529 account must have been open for at least 15 years, the funds to be transferred must have been in the account for at least 5 years, the Roth IRA must belong to the beneficiary of the 529 account, and that beneficiary must have earned income. Some states, including California, may still levy state taxes on such transfers regardless of how federal taxes treat them.
The following five key questions can help you further understand these rules and determine if you truly qualify for the transfer.
To be eligible for the transfer to a Roth IRA, the 529 account must have been open and maintained for at least 15 years. The 15-year calculation starts from the date the account was originally opened, not from the date you started contributing money or the date the beneficiary was designated.
Changing the beneficiary of a 529 account may likely restart the 15-year calculation period. This means the new beneficiary may have to wait another 15 years from becoming the beneficiary before being eligible for the transfer. If you were planning to transfer 529 funds to a Roth IRA, be cautious when changing beneficiaries.
The five-year rule: Any funds deposited within the five years prior to the transfer, along with the earnings on those funds, do not meet the transfer criteria. Only funds that have been in the account for at least five years qualify for the transfer.
This rule may pose challenges for grandparents who continue to contribute to a 529 account after their grandchildren have already started attending college. Even if the 529 account itself has been open for decades, the recently deposited money cannot be transferred to a Roth IRA until the five-year requirement is met.
The money cannot be transferred back under the account holder’s name of the 529 account, it can only be transferred into a Roth IRA under the name of the beneficiary of the 529 account. If you are a grandparent holding a 529 account, the money will be transferred into your grandchildren’s Roth IRA, not your own.
Additionally, the beneficiary’s earned income for the year must be at least equal to the amount being transferred into the Roth IRA. If your grandchildren have no earned income in a particular year, even if all other conditions are met, the transfer cannot happen that year.
The cumulative amount that can be transferred from a 529 account to a Roth IRA is capped at $35,000 per person, and the annual transfer amount cannot exceed the annual contribution limit for Roth IRAs in that year. For 2026, the IRS has set this limit at $7,500 for individuals under 50 years old and $8,600 for individuals aged 50 and above. At the current annual limits, it would take at least five years to transfer the full $35,000 lifetime limit.
The good news is that the transfer of 529 funds to a Roth IRA is not subject to the income limitations usually applicable to Roth IRAs (which gradually phase out contributions for high-income earners), providing a unique opportunity for high-income families to boost the Roth IRA savings for their children or grandchildren.
It’s essential to note that the transfer amount shares the same annual limit with other contributions made by the beneficiary to the Roth IRA in that year. For instance, if the beneficiary has already contributed $3,000 in cash in the year, the remaining Roth IRA contribution limit can be used for the 529 transfer.
This is an issue that many people easily overlook, and neglecting it could have significant tax consequences. While the transfer is tax-free at the federal level, this only applies to federal regulations and does not guarantee tax exemption at the state level.
However, most states that levy income taxes have indicated they will follow federal regulations. As of September 2025, 30 states have confirmed they will align with federal rules, including New York, Ohio, Virginia, and Illinois.
But there are also several states that have not taken the same approach.
• California residents who perform a 529-to-Roth IRA transfer may be subject to state income taxes and an additional 2.5% California tax on the portion attributable to investment income.
• New Jersey’s stance on this issue was listed as “pending” by some tax watchdogs until recently, but the state has since aligned with federal regulations, allowing tax-free transfers.
• Some states and the District of Columbia have indicated that account holders may need to make up for any previous state income tax breaks they received if they transfer 529 funds to a Roth IRA.
Before initiating any transfer, ensure you are aware of your state’s specific regulations. Tax policies concerning this rule vary and continue to evolve across states.
Would the transfer be affected by the income limits for the beneficiary’s Roth IRA?
No, this is one of the most valuable aspects of this regulation. In 2026, single taxpayers with a modified adjusted gross income (MAGI) over $153,000 and married couples with combined incomes over $242,000 typically cannot contribute directly to a Roth IRA. However, the 529-to-Roth IRA transfer is not influenced by these income restrictions at all. Therefore, this transfer is particularly valuable for families with adult children with higher incomes who were previously unable to contribute to a Roth IRA directly.
What happens if the beneficiary has no earned income in the year of the transfer?
The transfer cannot proceed in such a scenario. The beneficiary must have earned income at least equal to the amount being transferred in that year, which aligns with the regular requirement for Roth IRA contributions. If your grandchild is between jobs, pursuing postgraduate studies without scholarships or stipends, or for any other reason does not have earned income in that year, the transfer must be postponed. As long as the $35,000 lifetime limit has not been reached, you can reserve this unused transfer amount for a future year.
Does the transfer need to be conducted directly?
Yes. The fund must be transferred through a direct transfer between the trustee institutions. Do not withdraw money from the 529 account and deposit it into the Roth IRA on your own. This would be considered a non-qualified withdrawal from the 529, and the earnings portion might be subject to income tax and incur the standard 10% federal penalty. It is advisable to coordinate with both the 529 plan management institution and the Roth IRA custodian institution to ensure the direct transfer is completed.
How should this transfer be reported at tax time?
The transfer of funds will be reported separately through an IRS 1099-Q form provided by the 529 plan and a 5498 form provided by the Roth IRA custodian. The IRS categorizes such transactions as “qualified rollover contributions” and requires reporting in the 10th column of the 5498 form. This transaction should be included in the tax records of the beneficiary for the year the transfer occurs. Since the related documents involve both the 529 account management institution and the Roth IRA custodian institution, it is recommended that, when conducting such a transfer for the first time, you consult a tax professional to ensure the reporting is done correctly.
These are guidelines meant to help you understand the complex rules and implications of transferring funds from a 529 account to a Roth IRA. It’s crucial to carefully assess your eligibility and consider consulting with financial advisors or tax professionals before proceeding with such transfers to maximize the benefits and avoid any unintended tax consequences.