If you're a 529 plan account holder and there are unused funds in that account, consider transferring them to a Roth IRA. This option, introduced under the SECURE 2.0 Act and enacted in 2024, provides a tax-efficient way to repurpose leftover education savings without incurring penalties.
Previously, families facing unused 529 plan funds had limited choices: either withdraw the money and pay taxes (plus a 10% penalty on earnings) or repurpose it for another beneficiary's education. Let's take a look a the specifics of using this option.
Specifically, under the SECURE 2.0 Act, you can transfer unused funds in a 529 plan to a Roth IRA for the same beneficiary, without tax or penalties. Be aware that these tax-free rollovers are subject to several requirements and limitations:
Let's look at an example: Bernie and Linda opened a 529 plan for their daughter, Bridget, shortly after she was born in 2003. When Bridget graduates from college in 2025, there's $30,000 left in the account. Under the rule, Bernie or Linda (or, more specifically, the one designated as the 529 plan owner) can begin transferring those funds into Bridget's Roth IRA.
Because the 529 plan was opened at least 15 years ago (and assuming that no contributions were made in the last five years), the only restriction on the ability to roll over the funds is the annual contribution limit for Roth IRAs. Assuming that Bridget hasn't made any other IRA contributions for the year, Bernie and Linda can roll over up to $7,000 in 2025 (assuming Bridget has at least that much earned income for the year).
Bear in mind that if Bernie and Linda had opened the 529 plan when Bridget started middle school in 2012, they'd have to wait until the account was 15 years old, in 2027, to start transferring the funds. And if they made contributions to the 529 plan within the last five years, those contributions — together with any earnings on them — wouldn't yet be eligible for a rollover. If the account balance were large enough, however, the five-year limit probably wouldn't be an issue.
Finally, if Bridget's earned income for the year was less than $7,000, the amount eligible for a rollover would be reduced. For example, if she took an unpaid internship in 2025 and earned $4,000 during the year from a part-time job, the most Bernie and Linda could roll over in that year would be $4,000.
A 529 plan-to-Roth IRA rollover can be especially beneficial for families whose children receive scholarships, decide not to pursue higher education or finish school with funds left over. By rolling the funds into a Roth IRA, beneficiaries can take advantage of tax-free growth and withdrawals in retirement.
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