The potential boost to young people’s ability to save for retirement, meanwhile, is another benefit of the rule change. “This is a very valuable tool and an opportunity for young people to start a Roth IRA,” says Ian Berger, an IRA analyst at Ed Slott & Co., a tax consulting firm in Rockville Centre, N.Y. “But beware of the restrictions,” Berger adds.
First, the Roth IRA must be in the name of the beneficiary, not the owner of the 529 account (if the two are different). There also is a lifetime maximum amount, $35,000, that can be transferred to the Roth from the 529.
Another restriction: The 529 plan must have been open for more than 15 years. And rollover funds cannot include any contributions to the 529 account and earnings on those contributions made in the previous five years.
Rollovers, moreover, are subject to the annual Roth IRA contribution limit. While the 2024 limit has not yet been announced, the limit this year is $6,500. So it would take a number of years before being able to take full advantage of the $35,000 rollover allowance. Of course, the 529 plan beneficiary must have compensation in the year of the rollover at least equal to the amount transferred.