For years, one of the concerns parents and grandparents have had about funding a 529 college savings plan is a simple question:
What happens if there is money left over after the child finishes college?
Perhaps your child receives a scholarship. Maybe college costs less than expected. Or perhaps you simply did a great job saving and there is still a substantial balance remaining in the account.
Thanks to a change made by the SECURE 2.0 Act, some families now have another attractive option. Instead of leaving unused money indefinitely in the 529 plan, it may be possible to gradually move some of those funds into a Roth IRA for the 529 beneficiary. For the right family, this can turn leftover college savings into the beginning of a child's or grandchild's retirement savings.
How Does the New 529-to-Roth IRA Rule Work?
Beginning in 2024, federal law under Internal Revenue Code Section 529(c)(3)(E) began to allow certain funds remaining in a 529 education savings account to be transferred directly into a Roth IRA established for the beneficiary of the 529 account.
Importantly, this is not simply a withdrawal of the 529 account followed by a contribution to a Roth IRA. To qualify for the special tax treatment, the funds generally must be transferred directly from the 529 plan to the beneficiary's Roth IRA.
There are also several important limitations:
1. The 529 Account Generally Must Be at Least 15 Years Old
The 529 account must have been open for at least 15 years before it can qualify for a 529-to-Roth rollover. This requirement makes long-term planning important. A parent who establishes a 529 account when a child is very young may have considerably more flexibility by the time that child completes college.
2. There Is a $35,000 Lifetime Limit
A maximum of $35,000 per beneficiary can currently be moved from a 529 plan into a Roth IRA under this special provision over the beneficiary's lifetime.
That does not mean that the entire $35,000 can necessarily be transferred at once. The rollover is also subject to the annual IRA contribution limit.
For 2026, the general IRA contribution limit is $7,500 for an individual under age 50. As a result, transferring the full $35,000 will generally require multiple years. The annual IRA limit is indexed and may change in future years.
3. The Beneficiary Generally Needs Earned Income
The annual amount that can go into the Roth IRA is also limited by the beneficiary's taxable compensation for the year.
For example, assume your 22-year-old child graduates from college in 2026, starts a job and earns $60,000. If all of the other requirements are satisfied, up to the applicable annual limit could potentially be rolled from the child's 529 account directly into his or her Roth IRA. If the child earned only $5,000 that year, the amount that could be contributed would generally be limited accordingly.
4. Regular IRA Contributions Matter Too
The annual limit applies across the beneficiary's IRA contributions.
Suppose the annual limit is $7,500 and the beneficiary has already contributed $2,500 to an IRA for that year. The remaining amount potentially available for a qualifying 529-to-Roth rollover would generally be only $5,000. This is why families should coordinate these transfers with the beneficiary's overall retirement planning.
5. Recent 529 Contributions Cannot Simply Be Moved Into the Roth IRA
Congress also included a rule designed to prevent families from putting money into a 529 account shortly before transferring it to a Roth IRA. Generally, amounts contributed to the 529 during the five-year period preceding the rollover, along with earnings attributable to those recent contributions, cannot qualify for the rollover.
Why This Can Be Such a Powerful Planning Opportunity
Consider parents who started a 529 plan shortly after their daughter was born and consistently contributed to it throughout her childhood.
Their daughter attends college, graduates at age 22 and still has $40,000 remaining in her 529 account. Rather than viewing the remaining account as "too much money saved for college," the family may have another opportunity. Assuming all of the requirements are satisfied, they could begin transferring qualifying funds from the 529 account into their daughter's Roth IRA over several years, up to the $35,000 lifetime limit.
Their daughter could then have a meaningful Roth IRA balance while still in her twenties. And that is where the long-term potential becomes particularly interesting.
Money inside a Roth IRA can potentially grow for decades. Qualified Roth IRA withdrawals are generally tax-free, which means that money originally saved for college could ultimately help provide financial security during the beneficiary's retirement.
Starting Early Can Make a Big Difference
Imagine that $35,000 eventually makes its way from an unused 529 account into a child's Roth IRA while the child is still relatively young. If that $35,000 remained invested for 40 years and hypothetically averaged a 7% annual return, without additional contributions, it would grow to approximately $524,000. At an 8% hypothetical return, it would grow to approximately $760,000.
Those examples are purely illustrations, investment returns are never guaranteed, but they demonstrate why getting retirement money invested at a young age can be so valuable. The beneficiary has something that parents and grandparents cannot give themselves later in life: decades of potential compounding.
Does This Mean You Should Intentionally Overfund a 529?
Not necessarily.
A 529 plan is still primarily an education savings vehicle, and families should not treat it simply as another retirement account. The $35,000 lifetime rollover limitation also means that substantially overfunding a 529 can still create planning issues. But the new rule may reduce one of the traditional concerns about 529 plans.
Parents and grandparents no longer necessarily have to worry that every unused dollar will be "trapped" in the account if the beneficiary does not need all of the money for education. There are also other options for unused 529 funds depending on the circumstances, including changing the beneficiary to another qualifying family member, preserving the account for future education, or potentially using funds for certain other permitted educational expenses.
An Estate Planning Opportunity for Parents and Grandparents
The new rule is especially interesting for grandparents who want to help younger generations. A grandparent who establishes and funds a 529 account for a young grandchild is primarily helping pay for that child's future education. But if the account ultimately has money left over and the statutory requirements are satisfied, some of those funds may eventually help establish the grandchild's retirement savings as well.
That makes 529 planning part of a broader conversation about intergenerational wealth planning. Instead of thinking only about what you want to leave children or grandchildren
when you die, consider ways to strategically transfer wealth during your lifetime, whether through education funding, annual gifts, retirement planning, trusts, or other wealth-transfer strategies. Money that was originally intended to give a child or grandchild a head start on college may eventually give that same child or grandchild a head start on retirement.
If you, a friend, or a loved one would like to discuss establishing or restating an estate plan, please contact our Intake Department at 760-448-2220 or visit us online at www.geigerlawoffice.com/contact.cfm. We proudly serve families throughout California from our offices in Carlsbad and Laguna Niguel.
