The SECURE 2.0 Act, passed in 2022, created an important new planning opportunity for families with unused 529 college savings funds. Beginning in 2024, eligible 529 beneficiaries can roll over a portion of their unused 529 balance, up to $35,000 over their lifetime, into a Roth IRA. For families who saved diligently but did not end up needing all of the funds for education, this change provides meaningful flexibility and a way to preserve the tax advantages of those dollars.
Traditionally, 529 plans have offered tax-free growth when funds are used for qualified education expenses. However, if money is withdrawn for non-qualified purposes, the earnings portion of the withdrawal is subject to ordinary income tax and a 10% penalty. It is important to clarify that the penalty applies only to the earnings, not the full withdrawal amount. There are certain exceptions that can eliminate the penalty, but the rules can be nuanced and require careful review. The new rollover provision offers a cleaner alternative for many families. Instead of paying taxes and penalties on unused funds, eligible amounts can be transferred to a Roth IRA, where they can continue growing tax-free for retirement.
There are several important rules to understand. First, the $35,000 limit is a lifetime maximum per beneficiary. Second, rollovers are subject to annual IRA contribution limits. For example, if the IRA contribution limit in 2026 is $7,500, that is the maximum total amount that can go into the Roth IRA for that year, including any rollover from the 529. If $5,000 is rolled over in 2026, only $2,500 could be contributed separately to the Roth IRA that year. Unlike a traditional-to-Roth IRA conversion, this rollover counts toward the annual contribution cap. In addition, the beneficiary must have earned income equal to at least the amount being rolled over during that year. If your child earns $6,000, the maximum eligible rollover for that year would generally be $6,000, assuming it does not exceed the annual contribution limit. The 529 account must have been open for at least 15 years, and contributions made within the last five years, along with the earnings on those contributions, are not eligible to be rolled over.
For families who overfunded a 529 plan, for students who received scholarships, or for children who chose a path other than college, this provision can be a powerful opportunity. Instead of facing a tax bill and penalty, those unused dollars can be repositioned to help jumpstart retirement savings or buy a home. Establishing and funding a Roth IRA early in a young adult’s working years can provide decades of potential tax-free growth, which can have a significant long-term impact.
That said, the rules are detailed and timing matters. Coordinating earned income, contribution limits, and eligibility requirements requires thoughtful planning. In some situations, other strategies, such as changing the beneficiary or using funds for other qualified expenses, may still make more sense. This is not a one-size-fits-all decision, and understanding how this fits into your broader financial and tax picture is essential.
If you have a 529 account with unused funds, or if you are unsure how these new rules apply to your family, I encourage you to reach out. I would be happy to review your specific situation, determine eligibility, and help you develop a strategy that aligns with your long-term goals. Click here to book a call to get started. Thoughtful planning today can turn unused education savings into a powerful head start for retirement.
