With the new year almost here, a fresh technique to repurpose college savings accounts and move them into a tax-free Roth IRA will soon become available. When I first heard about this new rule that was part of SECURE 2.0, it sounded too good to be true. Who wouldn’t want the opportunity to move funds that are limited to education spending to a Roth IRA, which offers the promise of a lifetime of tax-free growth? Sure enough, there are many caveats to follow and pitfalls to be avoided, but ultimately there is the potential to move money from a 529 plan to a Roth IRA over time. Let’s consider some of the main qualifications and what you should keep in mind when determining if this is a viable option for you. Keep reading to the end for information regarding free 529 funds available for those born in 2020 and after.

In order for the 529 account to qualify for a rollover to a Roth IRA, the college savings plan must have been in existence for at least 15 years. Moreover, only amounts that have been contributed to the 529 account more than five years ago can be rolled over. That amount not only includes contributions to the account, but also the growth associated with it. As an example, if you’re considering a 529 plan to Roth IRA rollover on Jan. 2, 2024, the amount to be rolled over must be traced to a contribution (and the associated growth) made prior to Jan. 2, 2019.

The maximum amount that can be rolled over from a 529 plan to a Roth IRA is equal to the annual contribution limit for a Roth IRA. For 2024, that amount is $7,000 for those under 50 years old. If you hit your Roth contribution limit by rolling over 529 plan funds, you will not be able to contribute additional funds to a Roth IRA for that tax year. The lifetime Roth rollover limit per 529 beneficiary is $35,000.

To put funds into a retirement plan, you generally need earned income. With the 529 plan to Roth IRA rollover, the same rule applies. If you roll $7,000 from a 529 plan to a Roth IRA, that Roth owner must have at least $7,000 in earned income from work or self-employment in order to qualify. One nice caveat is that, unlike Roth IRA contributions, there are no upper income limits that would rule out the 529 to Roth rollover for higher income earners.

To qualify for a rollover, the Roth IRA owner must be the same person as the beneficiary of the 529 plan. Notably, with 529 accounts there is the possibility for the owner to change the beneficiary of the account to another qualifying relative, potentially including the parent of the beneficiary. Rules are still being released on these details.

While federal law allows for 529 to Roth rollovers, there are no signs that Colorado (and many other states) will likely permit these transactions to avoid taxation. Thus, it’s possible that you will owe Colorado income tax on a 529 rollover. This is similar to Colorado state tax treatment on using 529 funds for student loan payoff or K-12 education. Colorado income tax is currently just over 4 percent, so a Roth rollover may still make sense.

While it’s not relevant to Roth rollovers, the Colorado First Step Program will put $100 into a 529 account for parents who sign up by the end of this year for their child born in 2020 or later. Even better, upon qualifying for the program, parents can get matching contributions of $500 a year from CollegeInvest for five years. To find out more and sign up for the program, check collegeinvest.org/first-step/

David Gardner is a Certified Financial Planner professional at Mercer Advisors practicing in Boulder County. Opinions expressed by the author are his own and are not intended to serve as specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of publication.