Parents and grandparents funding 529 plans can help beneficiaries save for college AND retirement. 

While 529 plans were designed to be a college savings plan, new rules that went into effect in 2024 allow them to be used for retirement savings too.

How 529 funds can be used for retirement savings

The Secure 2.0 Act passed in 2022 changed the way excess funds in 529s could be used. Under the old rules, 529 money used for anything other than educational expenses meant that the account owner was assessed a 10% penalty and owed income taxes on withdrawals. New rules allow excess 529 funds to be rolled over into a Roth IRA tax-free and penalty-free.

Why there might be leftover money in a 529

529 savings plans are typically set up long before a child is eligible to attend college or trade school but when the student reaches the age for post-secondary education they might not need the funds. This could be because the child receives a scholarship, goes in the military, opts not to pursue higher education or other reasons.

Conditions for rolling 529 funds into a Roth IRA

Some conditions must be met in order to take advantage of the provision allowing 529 funds to be rolled over into a Roth IRA retirement account:

• Time: The 529 plan must be at least 15 years old and only contributions made more than five years ago may be rolled over
• Ownership: The Roth IRA must be in the name of the beneficiary of the 529 plan
• Rollover limit: $35,000 is the lifetime limit per beneficiary
• Annual limit: IRA contribution limits apply; for 2024 the limit is $7,000
• Income requirement: The allowable rollover amount is the lesser of the beneficiary’s earned income or the contribution limit; if a beneficiary has no earned income no rollover is allowed

If you’re the beneficiary of a 529 plan and would like to roll it over into a Roth IRA, consult with a tax advisor to ensure you comply with the rules.

 

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