Rolling Over a 529 to an IRA: Understanding Your Options

529 planIf you opened a 529 account for your child to pay for educational expenses, new rules mean new options for funds leftover in the account.


Educational savings accounts are big business. CNBC notes approximately 15 million 529 accounts were opened in 2022, with deposits of $480 billion.


We talked earlier about the benefit of 529 accounts to support the educational needs of families.  These accounts allow you to invest money now to pay for future educational expenses. Tax credits are available in some states for money going into 529 accounts and there are no taxes when the money is outgoing for a qualified educational expense like tuition and other school expenses. 


The funds in a 529 account can be used to benefit a child throughout their educational journey. When their education is complete, the money can be used to aid a sibling with the account maintained over time growing to meet the educational needs of the next generation.


Despite these benefits, owners of these accounts may not wish to maintain the account when college days are over. Those wishing to cash out a 529 account are met with an unpleasant 10 percent penalty on funds withdrawn. Recent rule changes created a new option for those leftover 529 account funds—the 529-to-Roth transfer rule.


The SECURE 2.0 ACT of 2022 altered a rule around the use of leftover 529 funds. Effective in 2024, the 529-to-Roth transfer rule will allow account holders to roll unused educational funds into a Roth IRA. There are some stipulations which include:

  • The 529 account must have been opened at least 15 years prior.
  • There is a maximum withdrawal limit of $35,000 over the life of the account.
  • Transfers to a Roth IRA have contribution limits.
  • Contributions from the previous five years cannot be transferred, nor can earnings on those contributions.
  • The Roth IRA is opened in the name of the beneficiary of the 529 account. If money remains within the account following the maximum distribution of $35,000, the account beneficiary can be changed to a new recipient. A 529-to-Roth transfer can then be taken by the new beneficiary after 15 years have passed.


As noted by the Senate Finance Committee in changing this rule, “Families and students have concerns about leftover funds being trapped in 529 accounts unless they take a non-qualified withdrawal and assume a penalty. This has led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education…Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education. They should be able to retain their savings and begin their retirement account on a positive note.”


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