With the rising costs of higher education, families often prioritize saving through 529 plans. A 529 plan is a tax-advantaged savings account aimed at covering qualified education expenses. 529 Plans offer tax free growth on withdrawals as long as they’re used for qualified education expenses.

However, questions arise about what to do with unused 529 funds if the beneficiary doesn’t need them for qualified education expenses. Thanks to the SECURE Act 2.0, there’s a new solution: transferring unused 529 funds into a Roth IRA. This provision offers a tax-advantaged way to put leftover savings to work for retirement.

Here’s what you need to know about 529-to-Roth IRA rollovers and how they can fit into your financial picture now or in the future.

What Is a 529-to-Roth IRA Rollover?

A 529-to-Roth IRA rollover allows funds from a 529 plan to be moved into a beneficiary’s Roth IRA without taxes or penalties, provided certain requirements are met. This option is particularly helpful for families concerned about overfunding a 529 account or facing penalties for nonqualified withdrawals.

Key Rules and Limitations

Before leveraging this new provision, it’s essential to understand the rules:

• Lifetime Rollover Limit
  • A lifetime maximum of $35,000 per beneficiary can be rolled over from a 529 into a Roth IRA.
• Annual Contribution Limits Apply
  • 529 Rollover contributions must adhere to the Roth IRA’s annual contribution limits. For 2025, this limit is $7,000 for individuals under 50 and $8,000 for those 50 and older. You can only transfer the annual limit each year.
• 15-Year Holding Period
  • The 529 account must have been open for at least 15 years. Contributions and earnings added in the five years prior to the rollover are ineligible for transfer.
• The Beneficiary Must Have Earned Income
  • The beneficiary must have taxable earned income equal to or greater than the amount being rolled over in that year.
• Beneficiary’s Ownership
  • The Roth IRA must be registered in the same name of the 529 plan’s designated beneficiary.

Let’s consider a hypothetical scenario to better understand the 529 to Roth IRA rollover rule

1. Jacky has Unused 529 funds, her parents saved $100,000 into a 529 plan for her college education. After receiving scholarships, Jacky only uses $65,000, leaving $35,000 unspent.
2. Jacky graduates from college and begins working at her first full time job. She earns more than enough to contribute the maximum to a Roth IRA this year.
3. Jacky’s parents can roll over $7,000 this year from the 529 into her Roth IRA. If Jacky continues working and earning enough income, they can rollover the full $35,000 balance within 5 years.

This approach not only avoids taxes and penalties, but also provides Jacky with a head start on retirement savings.

Benefits of 529 to Roth IRA Rollovers

1. Tax and Penalty Relief Under previous rules, withdrawing 529 funds for nonqualified expenses meant paying income tax and a 10% penalty on earnings. With this new option, families can avoid these costs entirely.
2. Flexibility for Overfunded Plans The rollover provision addresses concerns about leftover funds, such as when a beneficiary receives scholarships, chooses a lower-cost educational path, or decides on a different path and opts out of higher education.
3. Retirement Savings Boost Rolling 529 funds into a Roth IRA gives beneficiaries a tax-free head start on retirement savings, which can compound significantly over time.
4. No Income Restrictions Unlike regular Roth IRA contributions, the rollover is not subject to Roth IRA income eligibility limits, allowing higher earners to benefit.

Important 529 to Roth IRA Rollover Considerations

While the new 529 to Roth IRA rollover option is appealing, there are some considerations to keep in mind:

• State tax treatment. Not all states align with federal rules for qualified 529 expenses. In some states, a rollover might trigger state income taxes or penalties. Check your state’s rules and consult a tax professional.
  • 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.
• Changing the 529 plan’s beneficiary may reset the 15-year holding period requirement, delaying the ability to roll over funds.
• Coordination with other retirement contributions. If the beneficiary contributes directly to a Roth IRA or traditional IRA, those amounts will count toward the annual limit, reducing the rollover amount allowed for that year.

Other Options for Unused 529 Funds

If a rollover isn’t feasible, families have alternative ways to use unused 529 funds.

• Change the Beneficiary: Transfer the account to another family member, such as a sibling or grandchild, without penalties.
• Pay Off Student Loans: Use up to $10,000 from the 529 to pay down student loans for the beneficiary or their siblings.
• Keep the Funds for Future Use: Retain the 529 account for graduate school, career training, or lifelong learning opportunities.

Is a 529-to-Roth IRA Rollover Right for You?

The ability to roll over unused 529 funds into a Roth IRA provides families with more flexibility and reduces concerns about overfunding.

The SECURE Act 2.0 has made 529 plans even more versatile by allowing rollovers to Roth IRAs. This new feature helps families maximize the utility of their education savings while giving beneficiaries a valuable tool for long-term retirement planning. However, this strategy should complement, not replace, your broader financial and retirement planning goals.

By planning carefully and understanding the rules, you can make the most of this opportunity to support your loved ones’ futures—both in education and retirement.