Traditional IRA rolled over into 529 -- early withdrawal penalty?

You CAN'T roll the money over.

From the IRS point of view, it's two separate events. 1) distribution from IRA (fully taxable and penalized) and 2) contribution to 529 (neither deduction nor exception to the penalty rule).

While the 529 plan is modelled on the IRA, it's not an IRA. Contributing to a 529 plan is NOT an education expense, so it's not a penalty exception. The reference to the 529 plan in the penalty calculation in pub 590 is referring to the calculation of total education expenses paid during the tax year. You must actually pay tuition to have an expenses. If it's paid using 529 money, fine, but there must still be a tuition expense in the same year as the IRA distribution. Taking the money out of the IRA and parking it the 529 is not what they are talking about.

529 Withdrawal Penalty

I agree with Max. You will pay the 10% penalty unless over 59.5

A better idea would be to use the IRA to pay for the education expenses directly, that way you can avoid the 10% penalty. You would still pay the regular tax though. I have heard that many colleges do not consider IRA and 401K money in financial aid calculations, so by leaving it there you may get more aid.

I converted all my non deductible traditional IRA's to Roths and I save for college via Roths. I can withdraw the money, except gains, tax free after five years and the gains are tax free after 59.5 Hopefully, it will not be used to calculate financial aid.

Assuming they were under age 59-1/2, yes they'll owe the 10% penalty.

It depends on their age. If it was in the year they hit 59 1/2 then no.