From College to Retirement: Should You Roll Over Leftover 529 Funds to a Roth IRA?

Wondering what to do with the unused cash locked away in a 529 plan?

Maybe your child changed their mind about going to college, or you ended up saving more than was necessary. Or perhaps you've been putting off opening a 529 plan altogether (after all, fewer than a quarter of Americans have one) because you’re worried about what happens if you don’t use all the funds for education.

Well, thanks to provisions in the SECURE 2.0 Act, you can now roll over leftover 529 funds into a Roth IRA – if certain conditions are met.

Let’s explain how this works, and why it can help keep your savings working for you.

Understanding 529 Plans

First, a quick refresher: A 529 plan is a tax-advantaged savings account designed to help families save for educational expenses. The funds in a 529 plan can be used for qualifying expenses such as tuition, room and board, books, and more. They also grow tax-free, which makes them an appealing option for saving for college.

The catch? If you withdraw money from a 529 for non-education expenses, you’re typically hit with both income tax and a 10% penalty.

However, with the new changes in the SECURE 2.0 Act, there’s now a way to transfer unused 529 funds into a Roth IRA, bypassing these penalties—giving you more options to make the most of your savings.

Learn more about ways to save for college by downloading our free ebook: Saving for College: Financial Tools to Help Secure Your Student’s Future.

Tax-Free Rollovers: A New Opportunity

As of January 2024, Section 126 of the SECURE 2.0 Act allows tax-free rollovers from 529 plans into Roth IRAs, provided you meet certain conditions. This means that if you’ve saved for college and have leftover funds, you can now roll those over into a Roth IRA to help secure your retirement.

For families who have saved diligently, this is a big win, allowing them to avoid penalties and taxes when the beneficiary doesn’t need all the funds for education.

For a more in-depth look at how 529 plans work, check out our article Saving for College: 529 vs Brokerage Account.

The Tax Rules: What You Should Know

Under the new law, you can roll over unused 529 plan funds into a Roth IRA without paying income tax or penalties – something that was previously impossible unless the funds were used for education expenses.

However, there are some conditions to consider:

• The rollover limit: You can only transfer up to $35,000 from your 529 plan into a Roth IRA over the course of your lifetime. This rollover is also subject to annual Roth IRA contribution limits, which are $7,000 for people under 50 and $8,000 for those 50 and older for the 2024 and 2025 tax years.
• Qualified rollover criteria: Your 529 plan must have been open for at least 15 years before funds can be rolled over to a Roth IRA. Additionally, any contributions made within the last five years cannot be transferred.
• Beneficiary requirements: If the 529 plan holder is different from the beneficiary, the Roth IRA must be in the beneficiary’s name. Plus, the beneficiary must have earned income in the year of the rollover that is at least equal to the amount being transferred.

Why Does This Matter?

This change opens up a new path for families who may have saved more than needed for educational expenses or whose children decide not to attend college.

Instead of worrying about what to do with unused funds, you can now roll them into a Roth IRA, helping to secure your financial future while avoiding the tax penalties that come with withdrawing funds for non-education purposes.

At Advance Capital Management, we know that decisions like these can significantly impact your family's financial life – from paying for college to preparing for retirement. That’s why it’s essential to plan carefully. We have extensive experience guiding families through every financial decision, helping them make the most of their savings and investments, whether it’s for education or retirement.

Let’s Start Planning

If you’re wondering how to optimize your 529 savings or if you have questions about how this change could benefit you, we’re here to help. We can walk you through the details of 529 rollovers, tax implications and how to plan for your family’s needs from college to retirement.

Schedule a free consultation with one of our advisers today – and let’s make sure you’re on track to meet all your financial goals, no matter what life throws your way.