Roll over 529 plan funds to a Gusto Roth IRA

As of 2024, the Internal Revenue Service (IRS) allows you to roll over unused funds from a qualified tuition plan — commonly known as a 529 plan — to a Roth IRA. As long as all requirements are met, the rollover is tax- and penalty-free.

529 plans let you save for educational expenses on a tax-advantaged basis. While the rules offer flexibility in what expenses are covered and even allow you to change the beneficiary in certain circumstances, you may still end up with leftover funds once educational costs are paid.

Without this rollover option, any amounts withdrawn and not used for eligible education expenses are subject to a penalty tax. Rolling over to a Roth IRA gives you a way to keep those funds growing for retirement.

Because 529 rollovers are relatively new, some gray areas remain. This article covers what we currently know.

There are specific rules for when 529 plan funds can be moved to a Roth IRA:

• The 529 account must have existed for at least 15 years. (Further guidance is needed from the IRS, as it is unclear if this 15-year clock resets when the beneficiary of the 529 plan changes.)

• Amounts contributed to the 529 plan in the past five years — including earnings on those contributions — are not eligible to be rolled over.

• The amount that can be rolled over each year is reduced by any contribution made to either a traditional or Roth IRA by the IRA account owner for that year.

The beneficiary of the 529 plan can roll over the money to their own Roth IRA. It does not matter who contributed the money to the plan or who owns the account — only who the beneficiary is.

There is a lifetime limit of $35,000 per beneficiary. This includes all rollovers from any 529 plan to any Roth IRA for that beneficiary.

In addition to the lifetime maximum, rollovers are also limited to the IRA contribution limit for that year. If the eligible amount in the 529 plan is over the Roth IRA contribution limit, the beneficiary can complete rollovers across multiple years until either the entire eligible amount has been moved or the lifetime limit has been reached.

The beneficiary needs to have enough earned income to cover the rollover amount. However, the rollover is not subject to the income limits that apply to typical Roth IRA contributions.

To roll over funds from a 529 plan to your Gusto Roth IRA, contact a Gusto Retirement representative at [email protected]. We're happy to help you get the process started.