529 to Roth IRA rollover

goldenbear05
goldenbear05 Member Posts: 2 Newcomer
in State Filing

I did a rollover from my 529 to Roth IRA in 2025. Total of $7,000. All of the IRS qualifications were met. Because I live in California, the earnings on the rollover are state taxed and there is also a 2.5% penalty.

I found the section under California Income Differences in the state form called "Funds rolled from 529 to Roth IRA". It asks to enter my "529 tuition plan funds rolled to a Roth IRA". I believe this is incorrect and you should only enter the earnings portion and not the total amount rolled over. I was hoping someone could verify this.

Answers

  • GeorgeM
    GeorgeM FreeTaxUSA Agent Posts: 64 image
    edited January 19

    Hello goldenbear05:

    Even though your holding period may satisfy federal tax law, California tax law does not conform to the federal tax law regarding rollovers of the type you have effected. In this regard, the instructions for Schedule CA (Form 540) CA Adjustments for Residents provide the following:

    “Rollover distribution from an IRC Section 529 plan to a Roth IRA is includible in California taxable income. For California purposes, enter the rollover distribution amount from an IRC Section 529 plan to a Roth IRA that was excluded from income for federal purposes on line 8z, column C.”

    Here is a copy of the link to the above instruction. It’s not an active link, so if you want to review the specific instruction, you need to copy the link and paste it into a browser: https://www.ftb.ca.gov/forms/2025/2025-540-ca-instructions.html

    Given CA’s instructions for rollovers of this type, it appears that you need to report the entire distribution rather than just the interest earned.

  • goldenbear05
    goldenbear05 Member Posts: 2 Newcomer

    Thank you. Perhaps the issue is that the software is then using the $7,000 entered as fully taxable and subject to 2.5% penalty. In California, all non-qualified distributions of 529 plans are subject to tax and penalty but only the earnings portion. This is the same as any non-qualified distributions of a 529; or as Form 540 says, a Roth IRA (treated in the same manner as the earnings and contributions of a Roth IRA) where only the earnings portion is taxed and penalized.

    California 529 Scholarshare website says the following: "For California taxpayers, a rollover from a 529 plan account to a Roth IRA will be treated as a non-qualified withdrawal and the earnings portion of the withdrawal will be subject to California state income tax, including the additional 2.5% California tax."

    https://www.scholarshare529.com/resources/faq

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