Background

The 529 plan, created in 1996, is a tax-advantaged investment account designed to help families save for college. Money in a 529 grows tax-free, and withdrawals are also tax-free when used for qualified education expenses. 

While these accounts are a fantastic option for college savings, one common concern has always been flexibility. Parents worry about “overfunding” – saving more than their child needs – and then being stuck with unused funds. A child may earn a scholarship, choose a less expensive school, or not pursue higher education at all. 

In the past, leftover 529 funds could be tricky — you could withdraw them, but any earnings would be subject to both income tax and a 10% penalty if not used for qualified education expenses.

Over time, Congress has added new features to increase the flexibility of these plans – including the ability to use them for some K-12 expenses or limited student loan repayment and. A new rule introduced under SECURE 2.0 (effective 2024) provides another option for unused 529 funds: the ability to roll over unused 529 funds into a Roth IRA for the beneficiary.

This new rule gives families a tax-efficient way to repurpose leftover education savings and makes 529 plans more flexible than ever.

The Basics: What the 529-to-Roth Rollover Allows

With SECURE 2.0, certain 529 plan funds can now be rolled into a Roth IRA in the name of the 529 beneficiary (typically your child).

Here are some key rules for this provision:

Lifetime limit: Up to $35,000 per beneficiary can be rolled over during their lifetime.

Account age requirement: The 529 plan must have been open for at least 15 years, so not all 529 plans will be eligible for this provision immediately. 

Recent contributions excluded: Contributions (and any earnings on those contributions) made within the last 5 years do not qualify for a rollover. It is essential to track when the account was opened and when each contribution was made.

Same beneficiary: The Roth IRA must be in the beneficiary’s name, not the account owner’s name.

Annual contribution limits apply: This is one of the trickiest aspects of the new law. Rollovers count toward the annual Roth IRA contribution limit (currently the lesser of $7,000 or earned income). The beneficiary must also have earned income in the year of the rollover. It is Important to coordinate with any other Roth contributions made during the year to avoid overfunding.

In summary, any provision that increases flexibility on distributions makes 529 plans even more attractive. As noted above, parents often worry about “overfunding” — saving too much and facing penalties later if they want to use funds for another purpose. With the rollover option, those unused funds can be used to jumpstart a child’s retirement savings, decades ahead of schedule.

The 529-to-Roth rollover provision is a welcome new tool for families — turning potential “leftover” college savings into a lifelong financial asset. It helps eliminate the fear of overfunding education savings and reinforces the value of starting early.

If you have a 529 plan and want to explore whether a future rollover might make sense for your family, please reach out to your advisor.

Mary McCraw, CFP®

Vice President

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