529 to Roth IRA rollovers: here’s what to know
529 savings plans can be useful when saving for your child’s college education. However, if you’re reluctant to start saving because you don’t know whether your child will pursue a degree, a new rule is changing the savings game.
Thanks to a bill known as Secure 2.0, starting in 2024 people can roll over up to $35,000 from their 529 savings plan to a Roth IRA.
“It [529 rollovers] offers an option for those wondering what to do with unused assets,” says Rob Williams, managing director of financial planning at Charles Schwab.
We delved into the details behind rollovers, 529 savings plans, and when you should convert your funds.
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What’s a 529 savings plan?
A 529 savings plan—named after a section of the IRS tax code—is a tax-advantaged savings account used for educational expenses. These plans usually are administered by the state.
There are two types of 529 plans: prepaid tuition savings plans and education savings plans. With a prepaid tuition plan, parents and others can prepay tuition costs at a select higher education institution—typically a public college.
Education savings plans offer a bit more flexibility, allowing people to use funds to pay for educational expenses at any college or university or tuition at secondary schools. When you invest your money, you’ll receive different portfolio options, usually consisting of diversified mutual funds and exchange-traded funds (ETFs).
Qualified educational expenses include but are not limited to the following:
- Tuition
- Books
- Room and board
- Student activity fees
Pros & cons of 529 plans
A huge draw of 529 plans is that account holders can accumulate savings tax-free. Some states even provide a state income tax deduction, which means you can reduce your taxable income by contributing to a 529. Note, though, that 529 savings plan contributions are NOT eligible for federal income tax deduction.
One of the major drawbacks of a 529 savings plan is the penalty you’ll incur if you use your funds for noneducation-related expenses. You’ll be responsible for federal and state income taxes plus a 10% penalty.
That’s where the recent 529 savings and Roth IRA rollover rule comes in: if your child doesn’t attend college or doesn’t need all the funds in the account, you won’t have to worry about paying a penalty on the 529 funds they don’t use.
How can you convert a 529 savings plan to a Roth IRA?
Since there are a few hoops to jump through to convert your 529 savings plan funds to a Roth IRA, Williams doesn’t recommend investing in a 529 savings plan with the intention of using it to roll over your funds. Here are some of the qualifications you’ll have to meet before you can convert your funds:
- The 529 savings account must be open for more than 15 years
- The 529 savings account and Roth IRA must have the same beneficiary
- Funds must be in the 529 account for more than five years
- The beneficiary’s earned income must be at least equal to the rollover amount
You can convert up to $35,000 from a 529 savings plan to a Roth IRA. Additionally, you can only contribute up to the annual Roth IRA limit every year, which is $7,000 in 2024. That means if you chose to invest $1,000 in your Roth IRA one year, you could only roll over an additional $6,000 from your 529 savings plan that year. This means it can take multiple years to convert the funds as desired.
Let’s look at the following example: if you have $50,000 in a 529 savings plan, you can only roll over a total of $35,000 worth of funds and a maximum of $7,000 per year. After converting the maximum amount for five years, you will have $15,000 remaining in your 529 account.
| Year | Rollover Amount | Leftover 529 funds |
| 1 | $7,000 | $43,000 |
| 2 | $7,000 | $36,000 |
| 3 | $7,000 | $29,000 |
| 4 | $7,000 | $22,000 |
| 5 | $7,000 | $15,000 |
The takeaway
While the new rule took effect at the beginning of 2024, Williams suggests that people wait before rolling over their funds.
“You have until the end of the year for some of these rules to be clarified. Generally, we’re suggesting that people not rush,” says Williams.
For example, it’s still unclear whether changing the beneficiary on your 529 savings plan would reset the 15-year waiting period, so you may want to wait until the IRS provides more guidance.
In the meantime, if you want to bulk up your child’s retirement savings, you can open a Roth IRA for them as long as they have income. If they’re old enough to work, encourage them to take advantage of their company’s 401(k) match if it’s offered.
