Roth IRA rollover: 529 plans update: New rule lets families move up to $35,000 into a Roth IRA
Some reports say there are approximately 17 million 529 accounts in the United States. This shows that many families are using these plans to save money for college, according to Kiplinger. But sometimes there is a problem. Parents save money in a 529 plan, but later find out their child doesn’t need all the money for college. In some cases, the child decides not to go to college at all. In this case, the money in the 529 plan may remain unused.
Another situation arises when parents save a lot of money for education, and after paying for college expenses, extra money remains in the account. Some families delay opening a 529 account because they worry that if their education plans change, the money will sit there and be difficult to use. According to Kiplinger, due to new rules in the SECURE 2.0 Act, families will now be able to transfer unused money from a 529 plan to a Roth IRA retirement account if certain conditions are met. The change officially started at the beginning of 2024, making it possible to transfer money from education savings to retirement savings.
New tax rule for 529 plans
The SECURE 2.0 Act introduced many new rules regarding retirement savings. One important rule allows people to move money from a 529 plan to a Roth IRA without paying taxes. Section 126 of the Act changed US tax rules to allow these transfers, but only if certain conditions were followed. This means that if a family has extra money in a 529 plan, they can transfer that money to a Roth IRA retirement account.
Normally, if people withdraw money from their 529 plan for something other than education, they have to pay income taxes and penalties. However, with this new rule, families will be able to avoid these taxes and penalties if they move unused money to a Roth IRA. Because this rule gives families more flexibility with their savings, experts believe more parents may feel comfortable opening a 529 plan in the future.
The law states that families who save in 529 accounts should not face taxes or penalties if the student finds another way to pay for education through Kiplinger. According to the law, this rule allows families to preserve their savings and start building retirement funds instead of losing money due to penalties.
How much money can be carried?
A maximum of $35,000 can be transferred from a 529 plan to a Roth IRA during a person’s lifetime. The $35,000 cap applies to each beneficiary of a 529 account. Since the rule goes into effect in 2024, the lifetime rollover limit remains at $35,000 per beneficiary. Although the lifetime limit is $35,000, any rollover amount still counts toward annual Roth IRA contribution limits. The annual Roth IRA contribution limit for 2026 increases to $7,500, up from $7,000 in 2025. Individuals 50 and older can add a catch-up contribution of $1,100, bringing their total annual contribution to $8,600 in 2026. The catch-up contribution previously increased from $8,000 in 2025 to $8,600 in 2026. As Kiplinger stated.
Important rules and limitations
The 529 plan must have been open for more than 15 years for any rollover to occur. If the person who owns the 529 account is different from the beneficiary, the Roth IRA must be opened in the beneficiary’s name. Funds added to a 529 account within the last five years cannot be rolled over to a Roth IRA.
According to Kiplinger’s report, only $35,000 in total can be transferred to a Roth IRA, even if there is more unused money in the account. The beneficiary must have earned income during the year and the amount transferred cannot be more than his earnings for that year.
Why might this move be wise?
Rolling over unused funds allows money saved for college to be used instead of retirement planning. If parents have saved more than necessary for college expenses, they can transfer the extra money into retirement accounts rather than paying a penalty. Families whose children skip college can continue to use their savings productively through retirement investing.
As Kiplinger notes, the amount carried over from the 529 plan will count toward that year’s annual Roth IRA contribution limit. The beneficiary must have enough income that year to cover the amount carried forward. Although the transfer is tax-free under federal law, some U.S. states may still charge state taxes on the transfer. Financial experts recommend consulting a tax professional before making the decision to roll over. Rules regarding 529 plans and retirement savings can change over time, so people need to stay up-to-date to make the best financial choices.
FAQ
Q1. Can you move money from a 529 plan to a Roth IRA?
Yes, under the SECURE 2.0 Act, you can rollover up to $35,000 from a 529 college savings plan to a Roth IRA if certain rules are met.
Q2. What conditions must be met for a 529 to be rolled over to a Roth IRA?
The 529 account must have been open for 15 years, the beneficiary must have earned income, and the rollover must comply with annual Roth IRA contribution limits.
