Tax-advantaged 529 plans offer a leg-up for families who are saving for future education. In 2024, these plans allowed a new qualified use for families that may have saved more than they need—a Roth IRA rollover option.

Included in Section 126 of the SECURE 2.0 ACT, which is part of the Consolidated Appropriations Act of 2023 (CAA), these new changes let account owners roll over unused 529 plan assets into a Roth IRA in the name of the 529 plan's designated beneficiary, without being subject to tax penalty.

Basically, here's how it works: You can now roll over up to $35,000 in unused 529 assets into the beneficiary's Roth IRA without A) generating any taxable income or B) getting hit with the usual 10% penalty for non-qualified 529 account withdrawals. 

This means that once you have finished paying for your loved one’s education with the funds from your 529 plan, any remaining 529 funds can be used to give them an early jump start on saving for retirement, often years ahead of when they may have started saving for retirement. 

Like many of us, even if you've heard of a Roth IRA, you may be fuzzy on details about this retirement savings option. The IRS defines a traditional IRA as "a way to save for retirement that gives you tax advantages." A Roth IRA shares many of the same characteristics–including contribution limits and tax-advantaged growth but also offers some notable advantages.

Although you can't take a tax deduction on Roth IRA contributions (as with other forms of IRAs), the money does grow tax-free, and (here's the best part) when you retire, most IRA rules allow retirees to withdraw their funds without paying taxes as well, according to AARP. 

This means that your twenty-something 529 beneficiaries will likely see decades of tax-advantaged savings growth and then be looking at tax-free revenue in retirement. 
Assuming they've held on to the Roth IRA for at least five years (though it will probably be closer to 30 or 35 years), they'll qualify to start making withdrawals at age 59 ½ according to current IRS rules.

The IRS sets annual contribution limits for contributions to both traditional and Roth IRAs, and rollovers from 529 plans are no exception to this rule. 

Though there's a $35,000 lifetime rollover limit per beneficiary on funds transferred from a 529 plan, the IRS caps annual Roth contributions for the 2024 tax year (from any source) at $7,000, with a slightly higher cap for older investors.

So, if you have a maximum of $35,000 in 529 savings to transfer, you will likely need to roll over no more than $7,000 a year over five years unless the $7,000 limit increases.

Additionally, the 529 plan must be open for the designated beneficiary for at least 15 years, and any contributions made within the last five years, and the investment earnings associated with them, are not eligible for qualified rollover. Keep in mind there are other important provisions that apply under the Secure 2.0 Act.

This new 529 Roth IRA rollover option will provide relief to families that worry about saving more than their child needs for college or vocational training, or another qualified use. 

Ready to learn more? The Education Plan equips families with many online tools such as a glossary of terms, tax benefit information, a detailed FAQ, and a help center to allow people to access information when it’s convenient for them.  Our Learning Center offers families tips on saving for future education and college, strategies for maximizing your account and much more.  It's never too early or too late to begin saving for a family member's education.