Loosening 529-to-Roth Rollover Rules
Under the SECURE Act 2.0, taxpayers are permitted to roll unused Section 529 plan dollars into a Roth IRA if certain conditions are met. The most that a taxpayer can ever move from a 529 plan into a Roth IRA is $35,000 over the course of the taxpayer's lifetime. For the rollover to be permitted, however, the Section 529 plan must have been maintained for at least 15 years. Additionally, any 529 plan contributions made in the prior five years cannot be rolled into the Roth IRA. That includes earnings on any contributions that were made in the five years leading up to the rollover. The Roth IRA contribution limits for the year of the rollover also apply. In other words, the maximum that a taxpayer could roll over from the 529 plan to the Roth IRA in 2026 is $7,500 (with an additional $1,100 catch-up contribution for taxpayers aged 50 and over). Proposals would eliminate the lifetime rollover limit.
We asked two professors and authors of Tax Facts with opposing political viewpoints to share their opinions about recent proposals to eliminate the $35,000 lifetime limit on unused Section 529-to-Roth IRA rollovers.
Below is a summary of the debate that ensued between the two professors.
Their Votes:
Their Reasons:
Byrnes: The risk of incurring taxes and penalties if the child never has a qualifying use for the funds is a significant deterrent for parents who are otherwise interested in using these tax-preferred vehicles to save for education costs. Allowing parents to roll over unused 529 plan dollars in an unlimited amount will significantly reduce the uncertainty associated with funding these education savings accounts—thus encouraging parents to establish 529 plans and created dedicated education savings.
Bloink: Yes, removing the $35,000 lifetime limit on 529-to-Roth rollovers can be a powerful tool in helping parents get over the fear that the 529 plan dollars will be wasted. This proposal, however, would also leave all other restrictions associated with the 529-to-Roth rollover rules intact. What's overlooked is that to even take advantage of the existing $35,000 lifetime limit would require parents to execute rollovers from the 529 plan into the Roth over a period of years.
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Byrnes: As the law stands, there is a $35,000 lifetime limit on the amount parents can transfer from the 529 plan to a Roth account in the child's name. This limit itself could create a cap for parents who would otherwise use 529 plans to save for college—because parents would not be willing to risk putting more than $35,000 into the education savings account due to the rollover limit.
Bloink: The rollover amounts are limited to the annual Roth contribution limit ($7,500 in 2026). That itself may give parents pause, discouraging them from using the 529 plan in favor of simply directly funding a Roth account in the child's name. After all, Roth dollars can be withdrawn tax-and-penalty free after only a five-year holding period (and direct contributions are always accessible).
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Byrnes: This law would also give parents a positive way to give children with unused 529 plan dollars a head start on their retirement savings. Roth accounts are incredibly valuable. This law would give parents with unused 529 plan dollars a way to avoid the 10% distribution penalty that applies when funds aren't used for qualified education expenses while simultaneously providing the child with a valuable retirement benefit.
Bloink: What the drafters of this legislation may have overlooked is that parents want to take all of their unused 529 plan dollars and roll them into a Roth. They don't want to have to roll over small $7,500 amounts each year until the 529 plan is emptied. While this proposal is a good first step, it doesn't go far enough in loosening the restraints on unused 529 plan dollars. Requiring parents to roll over unused 529 plan dollars in a step transaction format seems unnecessary, given that the funds are already in a restricted tax-preferred account.