Updated July 31, 2026. Quick answer: the 529-to-Roth rollover does not get its own bucket — it shares the beneficiary’s annual IRA limit. For 2026 that limit is $7,500 (under 50): if your daughter contributes $7,500 to her own Roth in March, the 529 can send her $0 that year; if she contributes $4,000, it can send $3,500. The statute is IRC §408A(c)(3)(F), and most “roll your leftover 529 into a Roth!” articles never mention it.
Why this changes the strategy, not just the paperwork
The choice is never rollover-vs-nothing; it is rollover-vs-her-own-contribution. If the beneficiary has cash to contribute herself, using the limit on a 529 rollover just relabels dollars she could have gotten into a Roth anyway — while burning lifetime rollover cap. The rollover’s real value is for years the beneficiary wouldn’t have contributed: early-career years when cash is tight, years when her own money goes to a 401(k) match first, or high-income years when MAGI limits block her own Roth contributions but not the rollover.
The cap also sets the floor on the timeline: $35,000 at $7,500-a-year-minus-her-own-contributions is five-plus years minimum — start the clock early if the goal is emptying the account. Run the true number for this year: the rollover calculator.
Coordinate the kid’s Roth and the 529’s Roth. They share one door.
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The number that surprises people who bought a long time ago
Downsizing is the one home sale where the gain is usually large and the exclusion usually still covers it. A couple who bought in 1994 for $180,000 and sell at $760,000 with $46,000 of selling costs have a realized gain of about $534,000 before improvements. That is above the $500,000 joint cap — but decades of capital improvements are exactly what brings it back under, and most sellers have never added them up.
Improvements are the lever, and the records are the constraint
A new roof, an addition, a replaced HVAC system, new windows, a finished basement: these add to basis. Repainting and repairs do not. Thirty years of improvements on a family home routinely total six figures, and every dollar of it reduces the gain dollar for dollar. The practical problem is documentary, not legal — the seller who kept receipts pays less than the identical seller who did not.
Why downsizers should check the net investment income tax separately
A retiree with modest ordinary income can still be pushed over the 3.8 percent NIIT threshold by the sale itself, because taxable gain is net investment income. The thresholds are $250,000 on a joint return and $200,000 otherwise, written into Section 1411(b) as fixed figures with no indexing. A sale that produces $120,000 of taxable gain on top of $180,000 of other income crosses the joint threshold and picks up 3.8 percent on the part above it.
The move itself may change the tax
Downsizing usually means moving, and sometimes across a state line. Some states tax the gain the federal exclusion just removed. If the sale and the move are in the same year, the order of the two matters, and it is worth checking the destination state before signing.
Related
Methodology
- Exclusion caps, the 2-of-5 test, the nonqualified-use allocation, the reduced-exclusion fraction and the depreciation carve-out are taken from the text of 26 U.S.C. 121. The 3.8 percent rate and its thresholds are from 26 U.S.C. 1411. Both were read on 2026-07-30.
- Section 121 caps and Section 1411 thresholds are written in the statute as fixed dollar amounts with no indexing mechanism, so they are built in. Long-term capital gain brackets ARE indexed annually, so your rate is an input rather than a lookup.
- Figures were computed by two independently written engines that agree to the cent, and the calculator on this page reproduces both exactly.
- Federal only. State treatment varies and some states do not follow the federal exclusion.
Educational estimate, not tax advice, and not a filed return. Federal only. Confirm anything that changes a filing decision with a CPA or tax attorney.
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