Colorado’s 529-to-Roth IRA Rollover Now Available

I’ve written previously about how the Consolidation and Appropriations Act of 2023 now allows account holders to transfer money from 529 plans to the beneficiary’s Roth IRA beginning in 2024. Now that we’re in 2024, Colorado’s CollegeInvest 529 Plan (Direct Portfolio plan) has now posted the necessary form.

While hopefully you are in the Direct Portfolio plan, if you are in one of the others (Stable Value Plus, Smart Choice, or Scholar’s Choice) you may need to call them as I don’t see the forms for those plans posted yet. (I know that the form for Scholar’s Choice exists for sure, because when I called a few days ago they emailed that one to me, but it doesn’t work for Direct Portfolio.)

It’s important to remember that there are some significant restrictions on being able to do this.

• The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.
• The 529 plan must have been maintained for 15 years or longer.
• Any contributions to the 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be moved to a Roth IRA.
• The annual limit for how much can be moved from a 529 plan to a Roth IRA is the IRA contribution limit for the year ($7,000 for 2024 for those under 50), less any “regular” traditional IRA or Roth IRA contributions that are made for the year.
• The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.
• The beneficiary/owner of the Roth IRA has to have earned income for the year of the contribution, at least up to the amount contributed (in this case rolled over).

We didn’t have any trouble meeting these requirements, as we opened the 529 in 2001, stopped contributing around 2013, and our daughter is working full-time so will make more than $7,000 this year. The form (pdf) was pretty straightforward to complete, although it’s a bit annoying to have to mail it in instead of upload it. We mailed it today; I’ll try to come back and update this post when it (hopefully) arrives at Vanguard.

This is a nice option for folks who have overfunded their 529s (or, in our case, more accurately described as an incredible run of returns in the 2010’s). Again, I would highly recommend that everyone with young children open up a 529 and contribute at least a little bit as soon as possible. That way you start the 15-year clock in case this is something you might end up wanting to do down the road. This is especially true for Colorado folks, as you can get some matching funds if your child is less than 9 when you open the account. Even if you just put in enough to get the match and you don’t ever use any of these funds for college purposes, it will likely grow into the $35,000 limit for their future Roth IRA contributions.

A few additional notes.

• It’s possible that there may be some small Colorado tax implications from doing this, as CollegeInvest indicates that Colorado may want to recoup any Colorado tax savings we received from contributions to the 529 plan that are then rolled over. I’ve put in a request to the Colorado Department of Revenue for clarification, but still haven’t heard back. (Since the vast majority of the account balance is earnings which did not get a Colorado tax deduction, I would think we wouldn’t need to worry about this. But they may decide to prorate it or something).
• On the form there is no place to indicate what year you are making the Roth contribution for. I’m assuming this means it will default to a 2024 contribution. I imagine that’s what they intended when they set the start date to January 1, 2024, but technically we can still make 2023 Roth contributions as well. Going forward I think this is something they might want to clarify/allow, as I can see folks wanting the option to choose the prior year if they do the rollover before April 15th.
• There is still no guidance from the IRS about how they are planning on handling changes to beneficiaries; whether that will start a new 15-year clock or if you can “inherit” the existing account’s start date.

Update 2-7-24: CollegeInvest processed the rollover and mailed the check to Vanguard.

Update 2-17-24: The money has arrived at Vanguard and been made as a 2024 Roth IRA contribution.

Update 1-28-25: We received our 1099-Q for this rollover, and approximately 30% of the $7,000 was considered to be from “contributions”, meaning we’ll have to claim it on our Colorado state tax return (Colorado decided that they wanted to “recover” any of the contributions that we had previously received a state tax credit on and they are somehow calculating how much of the distribution was from contributions as opposed to earnings.) The unexpected part, however, is that the 1099-Q was issued in our daughter’s name and Social Security number, meaning she will have to claim it on her taxes. I was expecting that since we had received the tax deduction for the contribution when it was made, and the account is in our name, that the 1099-Q would be under my Social Security number (as the account owner). Not a huge deal (Colorado has a flat income tax rate, so the same dollar amount of taxes either way), but something to be aware of.