With the passage of the SECURE 2.0 Act, families now have an exciting new financial planning option: rolling unused funds from a 529 education savings plan into a Roth IRA. This game-changing provision, effective January 1, 2024, offers a tax-advantaged way to repurpose leftover college savings and help young adults jumpstart their retirement planning. But like most IRS rules, this one comes with important caveats and strategic considerations.
In this article, we'll break down the eligibility requirements, contribution limits, tax implications, and planning tips surrounding this new 529-to-Roth IRA rollover option.
Understanding 529 Plans and the SECURE 2.0 Update
Traditionally, 529 plans have been used to save for qualified education expenses such as college tuition, books, and room and board. The earnings grow tax-free, and withdrawals are also tax-free if used for qualified educational purposes.
However, one of the drawbacks of 529 plans has been the risk of overfunding. If the beneficiary doesn’t use all the funds for education, withdrawals become subject to income tax and a 10% penalty on the earnings. Recognizing this challenge, the SECURE 2.0 Act introduced a rollover provision that allows families to transfer unused 529 funds into a Roth IRA under certain conditions, providing a new layer of flexibility.
Key Rollover Rules
To take advantage of this new rollover option, families must meet strict eligibility requirements:
- The 529 plan must have been open for at least 15 years.
- The beneficiary must have earned income equal to the amount being rolled over in the given year.
There are also contribution limits to consider:
- The rollover is subject to annual Roth IRA contribution limits — $7,000 for 2025 (or $8,000 if the
beneficiary is age 50 or older).
- There is a lifetime rollover cap of $35,000 per beneficiary.
- Roth IRA contribution eligibility (AGI phaseouts) does not apply to this rollover.
Tax Implications
From a federal tax perspective, the rollover is tax-free and penalty-free — assuming all requirements are met. This helps families avoid the usual 10% penalty and income tax associated with non-qualified 529 withdrawals.
However, state tax treatment is more complicated. Some states offer tax deductions or credits for
contributions to 529 plans, but they may try to recapture those benefits if the funds are not ultimately used for educational purposes. According to the National Association of State Treasurers, “the potential for recapture varies by state, and families should consult state-specific 529 plan rules.”
Strategic Considerations
Retirement Boost for Young Beneficiaries
This provision presents a major opportunity for younger adults. If a beneficiary finishes college with leftover 529 funds, they can now start building retirement savings without needing to make direct contributions out of pocket — a move that benefits from decades of compounding growth.
Avoiding Overfunding Risks
While the rollover option adds flexibility, it’s not a reason to overfund a 529 plan. The lifetime cap of $35,000 means that families should still be conservative in estimating future educational expenses and avoid using 529s as primary retirement tools.
Planning Tips
- Coordinate rollover timing with the beneficiary's income. Since the Roth IRA contribution must match earned income, the beneficiary must have a job in the year of the rollover.
- Consider the long-term implications for estate planning. Moving 529 funds into a Roth IRA transfers control to the beneficiary and may affect gift tax considerations if other assets are involved.
Conclusion
The new 529-to-Roth IRA rollover rule offers families a valuable financial planning tool — especially for those with leftover education savings. It provides a tax-efficient way to support a young person’s retirement goals, making higher education savings plans even more versatile. However, navigating the fine print is essential. Families are encouraged to work with a financial advisor to ensure they meet all federal and state-specific requirements and to optimize both education and retirement outcomes.
Sources:
IRS. "529 Plans: Questions and Answers." https://www.irs.gov/newsroom/529-plans-questions-and-answers
U.S. Congress. “SECURE 2.0 Act of 2022.” Division T of the Consolidated Appropriations Act, 2023.
National Association of State Treasurers. “State-Specific 529 Plan Considerations.” https://nast.org
Morningstar. “How the New 529-to-Roth IRA Rollover Works.” https://www.morningstar.com
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