| ||||||||||||
If fear of penalties has prevented you from contributing to a 529 college savings plan for your child, you’re not alone.
529 savings plans are funded on an after-tax basis, yielding no immediate tax deduction, but the earnings typically grow federal income tax-free if used for qualified education expenses, such as tuition, fees, books, and room and board. Individual states may also offer a full or partial tax deduction for residents who invest in the 529 college savings plan operated by their state.
That’s a big perk that could potentially help supercharge your savings. But many families miss out on the benefits of a 529 because they worry that their child may choose not to go to college. Or, that they may oversave if their son or daughter gets financial aid, chooses a cheaper school, drops out before finishing, or qualifies for employer tuition assistance.
Why? Until recently, any earnings in a 529 account that were not used for qualified education costs were generally subject to ordinary income tax plus an additional 10 percent tax for non-qualified withdrawals. Contributions, which are made on an after-tax basis, are never subject to taxation or penalties.
Relatively recent changes to the law, however, are offering families more flexibility.
Connect with a MassMutual financial professional
529 rollovers to a Roth IRA
The One Big, Beautiful Bill Act (OBBBA) expanded 529 plan benefits by allowing 529 funds to be used for broader educational expenses, including K-12 tuition and supplies, homeschooling, educational therapies for disabled students, and postsecondary career training like apprenticeships and licensing. Beginning Jan. 1, 2026, account owners can use up to $20,000 in 529 plan savings per year for qualified elementary and secondary education expenses, up from $10,000 in 2025.
Unused 529 funds can also be transferred to a Roth IRA for the beneficiary. While the unused savings do not go back to the account holder, typically a parent or grandparent, it can give the beneficiary (child, grandchild, student) a big head start. (Related: Custodial Roth IRAs: An early retirement start for your kids)
“Many families worry that money will be trapped in their 529 account if their child decides not to go to college, or the parents, grandparents did too good a job of saving and there are excess funds in the account,” said Kira Robinson-Kates, a financial professional with Baystate Financial in Wellesley, Massachusetts. “The new rule alleviates that fear, and lets parents and grandparents know that there is a very attractive plan B for excess 529 plan balances. Instead of a problem, leftover 529 plan funds suddenly become an incredible gift for a child. As a parent, now I’d be thrilled to have over saved for my children’s education, and know that I can help bolster their retirement planning as well.”
529 Roth IRA rollover rules
There are no income limits on 529-to-Roth rollovers, as there are on Roth IRA contributions, but the new transfer allowance does come with some rules:
- There is a $35,000 lifetime limit on rollovers from a 529 to a Roth IRA.
- The 529 account must have been active for at least 15 years.
- You cannot transfer 529 earnings or contributions that were deposited in the last five years.
- The annual conversion amounts are limited to the annual Roth IRA contribution limit ($7,000 in 2026, plus an additional $1,000 for those age 50 and older).1 Thus, it would take up to four or five years to transfer that $35,000. Depending on when your contributions were deposited, it may be necessary to wait until the five-year period has passed to transfer all funds.
- 529 conversions apply only to Roth IRAs, not traditional IRAs.
- The Roth IRA account owner must be the same as the 529 plan beneficiary.
What is a 529?
A 529 plan, or qualified tuition program, is a tax-advantaged investment account that was designed to encourage families to save for their child’s future education costs. They are named after the section of the federal tax code that lays out the plan’s rules.
There are two types of 529 plans:
- The most common by far is the 529 college savings plan, which held total assets of $388 billion at the end of 2022, according to Congress. These plans allow college savers to contribute after-tax dollars to a special tax-advantaged account where contributions and investment earnings grow free of federal taxes if used for qualified education costs. The account owner chooses how to invest contributions and bears all investment risk, similar to an IRA. There are no guarantees of growth. While 529 funds used for nonqualified expenses typically incur penalties, some exceptions apply. Account owners, for example, would typically not be penalized if the beneficiary dies or becomes disabled, receives a scholarship, or decides to attend a U.S. military academy. However, you would still owe income tax on the earnings.
- The 529 prepaid tuition plan, with $24.5 billion in total assets at the end of 2024, allows contributors to lock in today’s rates for tomorrow’s college tuition and fees, an appealing option given that in-state tuition prices for four-year public schools have outpaced the rate of inflation for much of the last decade, according to the Independent Directors Council. Most 529 prepaid tuition plans are sponsored by state governments and many are tied to a specific public in-state institution, making them more restrictive than 529 college savings plans. That said, your child will typically not lose money if he or she decides to attend a different school, as funds can often be transferred or refunded. (Related: The pros and cons of prepaid versus savings 529s)
Other ways to deploy unused 529 funds
Shana Despres, a financial professional with GoldBook Financial in Scottsdale, Arizona said it’s important to remember that there are many other ways to utilize unused funds in a 529 plan as well. The account owner may:
- Change the beneficiary to a relative (self, siblings, parents, step-relationships, cousins, nieces, and nephews) for use in their educational expenses both penalty-and-tax-free.
- Use up to $10,000 in a 529 plan to pay off student loans for the beneficiary.
- If your child receives a scholarship, the 529 plan funds that match the scholarship amount can be withdrawn without the 10 percent additional tax for nonqualified withdrawals, but earnings will still be subject to ordinary income tax.
- Use up to $20,000 in 529 plan savings per year for qualified elementary and secondary education expenses.
- Beginning in 2026, unused 529 funds can be transferred to a Roth IRA for the beneficiary, which can potentially give the beneficiary (child or grandchild) a head start on retirement savings.
As a last resort, and probably the least desirable option, account owners can take a non-qualified withdrawal from their 529 plan. The earnings portion of their withdrawal would be subject to ordinary income tax, plus a 10 percent additional tax.
“Each family’s situation is different and should be discussed with the appropriate professionals —tax, legal, and financial — before executing,” Despres said.
Indeed, a financial professional can help you determine whether a 529 plan is right for you, which type of 529 is most appropriate based on your goals, and what strategy works best for any unused assets in your 529 account.
Conclusion
A 529 college savings plan is a potentially valuable tool to help families put money away for their child’s college education. But fear of penalties and unintended tax consequences have prevented many parents from taking advantage.
However, the new rules for 2024 will enable account holders to transfer up to $35,000 of unused 529 savings to a Roth IRA retirement account for their child may put some families’ minds at ease and encourage more parents to maximize tax-advantaged tools for college savings.
“In financial planning, the best designed plans address goals and concerns today while also being flexible enough to change as life changes,” said Robinson-Kates. “Parents may be convinced their one-year-old is college bound, but life is filled with surprises. This new transfer rule gives parents and grandparents a way to save for higher education, with a safety net if the course changes.”
_________________________
Frequently asked questions about rolling 529 funds over to a Roth IRA
Q: How much can you roll over from a 529 to a Roth IRA?
A: You can roll over a lifetime maximum of $35,000 from a 529 plan into a Roth IRA for the same beneficiary. Annual rollovers are capped at the Roth IRA contribution limit — $7,500 in 2026 for those under 50, or $8,600 for those 50 and older — meaning you’ll typically need five or more years to reach the full lifetime limit.
Q: What are the rules for rolling over a 529 to a Roth IRA under SECURE 2.0?
A: The SECURE 2.0 Act (effective January 1, 2024) established six key requirements: the 529 account must have been open for at least 15 years; contributions made in the prior five years are ineligible; annual rollovers cannot exceed that year’s Roth IRA contribution limit; the $35,000 lifetime cap applies per beneficiary; the beneficiary must have earned income equal to the rollover amount; and the transfer must be made directly trustee-to-trustee.
Q: Do 529-to-Roth rollovers count against the annual Roth IRA contribution limit?
A: Yes. Each year’s 529-to-Roth rollover counts toward the beneficiary’s annual Roth IRA contribution limit. If the beneficiary already made Roth contributions that year, the rollover amount plus those contributions cannot exceed the annual cap. However, the income limits that normally restrict Roth IRA eligibility do not apply to 529-to-Roth rollovers, making them potentially more accessible to high earners who couldn’t otherwise contribute to a Roth.
________________________
Discover more from MassMutual…
10 mistakes to avoid with 529 saving plans
Why saving for retirement early is important
A primer on the types of 529 savings strategies
________________________________________
