Rolling Over Leftover 529 Funds Into A Roth IRA: Who Really Benefits?

A 529 plan is one of the best generational wealth transfer vehicles. Instead of just giving our kids or grandchildren money, it's way better to give them the gift of education. Thanks to the SECURE Act 2.0, we will be able to roll over leftover 529 funds to a Roth IRA without taxes or penalties.

As a parent, it was rational to feel hesitant about funding a 529 plan or contributing too much. With restrictions in place on how the plan's money could be spent, parents rationally hedged the way they saved for a college education.

In fact, one of the main questions that has come out of my 529 savings guide by age post is whether to contribute to a Roth IRA or a 529 plan to pay for college. Contributing to both plans, if you are eligible, is a smart move.

In the past, the only real option for 529 funds that were not used for some kind of secondary education program was to roll the money over to another beneficiary, either for school expenses or to repay student loans.

Thanks to the SECURE Act 2.0, the 529 plan becomes more valuable due to the Roth IRA conversion option. Here are the details.

Rules For Converting Leftover 529 Funds Into A Roth IRA

The government has created strict rules and limits for converting leftover 529 funds into a Roth IRA. After all, the government still wants to earn as much money from its citizens as possible.

1) Rollovers can begin in 2024. Anything can happen between now and 2024, so stay on top of the latest rules. I'll certainly be updating the date if anything changes.

2) Same beneficiaries. You can't roll over leftover 529 funds to a different Roth IRA beneficiary. This is a good thing as it protects the beneficiary. It also keeps the spirit of taking care of your loved ones alive.

3) Rollover amount is subject to the annual Roth IRA contribution limit. The annual contribution limit is $6,500 in 2023, or $7,500 if you are 50 or older. The Roth IRA contribution limit will likely go up in $500 increments every three-to-five years.

4) Lifetime conversion limit of $35,000. Although $35,000 seems relatively low, my bet is the lifetime conversion limit will increase with inflation over time. After all, college and private grade school tuition has historically inflated faster than inflation.

5) The 529 plan must be open for at least 15 years. For those of you who've been delaying opening a 529 plan, here's another reason to start now. You could even open one with a minimum amount of money and then superfund the 529 plan years later. It is unclear whether the 15-year time resets if you change beneficiaries.

The Value Of A 529 Plan Goes Up

The rules for converting leftover 529 funds into a Roth IRA will become clearer over time.

But the bottom line is the value of a 529 plan goes up. Therefore, the decision to contribute to a 529 plan or superfund a 529 plan also increases for all socioeconomic classes.

At the very least, open up a 529 plan with $1,000 to get the timer going for the 15-year age hurdle before rollovers are allowed. Then have a goal to grow the 529 to $35,000 or whatever the lifetime conversion limit is in the future.

This way, the beneficiary at least has some tax-advantaged funds to use for whatever they want in the future. One of my regrets was not contributing to a Roth IRA when I could. If I had for several years, I would have over $100,000 in my Roth IRA account today!

I won't make the same mistake with my children. Therefore, I've opened up custodial Roth IRA accounts for each. To be able to earn tax-free income below the standard deduction limit, contribute to a Roth IRA that grows tax-free, and then be able to withdraw funds tax-free is a no brainer.

When Rolling Over 529 Funds To A Roth IRA Doesn't Matter

Although the value of a 529 plan goes up with the new rules, there are two scenarios where being able to roll over leftover 529 funds really doesn't matter.

Scenario 1. If you plan to make your kids 529 plan millionaires, then being able to roll over leftover 529 funds is a benefit, but not a big deal. After all, the $35,000 Roth IRA rollover limit only equals 3.5% of $1 million.

Further, if you have the means to make your kids 529 plan millionaires, your kids are probably set no matter what. You've likely already set up a trust fund to provide financial insurance after college.

Scenario 2. If you don't anticipate a 529 plan will cover all secondary education expenses, being able to roll over leftover 529 funds also doesn't matter. You won't have any leftover funds to roll over!

Who Is Most Excited About The 529 Plan Rollover Benefit?

The only people truly excited about being able to roll over leftover 529 funds into a Roth IRA are:

  • Meticulous middle-class planners who contribute the perfect amount to a 529 plan that covers all expenses plus the rollover limit leftover
  • Meticulous middle-class planners who contribute the perfect amount to a 529 plan that covers all expenses, and whose kids end up earning grants to attend school equal to the rollover limit
  • Parents who never planned to change 529 beneficiaries for generational wealth transfer purposes
  • Politicians who may earn more votes and stay longer in power
  • Financial planners, personal finance bloggers, and think tank researchers who have been encouraging more citizens to save more money
  • Demographers who are concerned about fertility rates and what a decline in childbirths means for respective countries

The reality is, being able to roll over 529 funds to a Roth IRA is not a “game changer” as some make it seem. The new laws simply provide more mental relief to 529 plan contributors who wonder whether their money is going into a black hole or not.

I doubt most 529 plan balances are able to fully fund four years of college anyway. Even with these new 529 plan benefits, the government can always change its mind in the future.

Couples Who Want Children Are The Biggest Beneficiaries

One of the main reasons why my wife and I delayed having children until our late 30s was due to a lack of financial security. Living in New York and San Francisco is expensive!

Before age 35, I didn't feel like we had enough money or time to properly take care of children. Therefore, ironically, we waited until we no longer needed jobs to have children. When we finally decided we were ready to have children, our biology didn't cooperate for three years!

No wonder more people are deciding to have children later, fewer children, or not at all. The burden to find a suitable partner, find purpose at work, build enough wealth, and feel financially secure enough to have children is immense.

We have already seen a significant increase in loneliness. If more people felt more secure, maybe there would be more love and by extension, more babies.

I'm positive we would have had children sooner, and maybe one more child, if the cost of raising children was lower. At 17, I made a conscience choice to attend William & Mary because the in-state tuition was $2,800 versus $22,000 at Babson College.

In other words, plenty of middle-class parents and kids like me are thinking about the future at an early age. Making it easier to save for college may make parents less fearful of having children or more children.

Total fertility rate around the world

Solutions To Increasing The Total Fertility Rate

If the government truly wants to increase fertility rates, then adding benefits to the 529 plan is one small step. A growing population is good for society because it creates more earnings, more tax revenue, and a stronger safety net for older generations.

Below is a fascinating chart showing the projected populations of China, India, Nigeria, the USA, and Japan.

Population projections in the year 2100 for China, India, Nigeria, USA, Japan

Due to the one-child policy in China for decades, the country will likely go through a significant deceleration in growth over the coming decades. On the other side is Nigeria, which will likely see a boom in population growth over the next 80 years.

China's fertility rate on the decline due to one-child policy

Hence, as someone who invests in long-term trends to get rich, investing in Nigeria and Africa is something we should all consider. AFK and NGE are two ETFs to explore. But when you look at their respective charts, you realize there are clearly growing pains!

Here are some solutions to improving fertility rates in America:

  • Making more colleges free
  • Limiting tuition increases to no greater than the rate of inflation
  • Forgiving student loan debt
  • Promoting trade school and online certifications
  • Promoting state universities and community colleges
  • Allowing for pre-tax 529 plan contributions and tax-free usage
  • Making it easier to build more housing
  • Mandating three months of paid parental leave benefits

If there are no policy changes, the future might see only the very rich or the very poor having kids. The middle class will simply opt-out. But the positive of not having kids is that more people could retire earlier and be happier as a result!

We Will Be “Maxing Out” Our 529 Plans

As a personal finance writer and author, I strongly believe education is what will set us all free. Therefore, I plan to keep contributing the maximum gift tax limit per year until I reach the legal maximum contribution amount.

The annual gift tax exclusion amount is $17,000 in 2023. And the maximum 529 plan contribution amount in California is $529,000, although the plan can grow more than $529,000 with returns. Check your own state's 529 plan contribution limit if you plan to max out your 529 plans as well.

If my wife and I provide nothing else for our children, it will be the gift of education. Once you have the proper education, endless possibilities open up!

Reader Questions And Suggestions

Readers, are you excited about being able to roll over leftover 529 funds into a Roth IRA? Do the new rules change your 529 plan contribution plans? How much do you plan to contribute to 529 plans?

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33 thoughts on “Rolling Over Leftover 529 Funds Into A Roth IRA: Who Really Benefits?”

  1. As a parent of three young children, we’d already setup a prepaid college plan for each child. However, with this rule change, we’re strongly considering opening 529s for each and leveraging them as a retirement instrument. I like this rather than merely a UTMA/UGMA to get compounding + time working in their favor. For about $90/month total, we can set each kid up with somewhere in the $1M range by age 65.

  2. Bill Markowitz

    Son will graduate with 45K leftover ( 20 is “earned” ) .
    He’s on the Autism spectrum and going to enroll in a
    program in NYC called THE DORM. But it is not “accredited”
    in terms of IRS guidelines as post secondary education yet
    it is to help people with challenges get acclimated to the city
    and find jobs. Obviously its educational in nature. He also has an
    ABLE account set up. What is best thing to do ?

    Thanks

    1. It seems like despite the school not being accredited, it is a school with the intention of helping young adults learn and assimilate into society. Pls double check either your 529 funds can be used there. I’d be shocked if the school wasn’t eligible.

  3. Reading comments here and blown away at the idea of opening one for yourself and rolling it. That seems like a big loophole! Would you be able to dig a bit deeper into that? And vs the back door Roth? I’m looking for ways to fund early retirement.

  4. I’m considering opening a 529 for my self. I’m 45 and max out all my other options (401k, backdoor Roth etc). My thought is that this could grow over 15 years and I can convert to a Roth starting at 60.

    Any reason not to do this??

    1. Sounds reasonable. Are you earning too much to contribute to a Roth IRA now?

      The government could always change the rules of conversion. So it’s good to have someone you can name as a 529 beneficiary other than yourself, if so.

  5. We are a fan of the 529 Plans!! We started contributing to our 2 kids accounts when they were tiny and 529’s became available. Both have graduated college, hard to believe 10 and 6 years ago, respectively. The deal when they were going to college was that we would pay tuition, room and board, food for 4 years only. Any party money, was on them. If it takes them longer to finish college beyond 4 years, on them. If they wanted to go to grad school, on them. If their GPA’s fell below 3.0 average, then a prorated amount would be withheld from their funding, which they would have to cover out of their pocket until they achieved a 3.0 or better. If they quit or flunked out. No more funding. Bottomline, both kids finished in 4 years, both with honors (magna and summa , respectively). Both applied scholarships to their funding reducing the draw on their 529. 1 has gone on to receive their grad degree which they funded on their own while working full time. Both started their careers and lives debt free and are doing quite well at their respective ages saving for the future. We hope that continues. Today, what remained in their respective 529 accounts is still there and most recently 1 of our kids has started their family and the money that they had in their account is now seed money for their child. As grandparents we continue to fund the account. Yes, it is a great vehicle to invest in our family and now with the Roth option gives more flexibility depending on where education goes in the next 18 to 20 years.

  6. I ended up being significantly over funded for my son’s 529, as he has so far opted not to attend university. It seems that opening 529’s now for both my wife and I and then systematically funding from his 529 and then rolling over to Roth’s over time could save us the taxes and 10% penalties on $70 K of income. (That is, if I understand this correctly).

    1. Wow. If that works, that’s a brilliant plan. Are you going to do this? I’d be so curious to find out if it works.

  7. I had set up a 529 plan eight years ago when my oldest child was approaching his first birthday. I did it on a whim; I made a funding deposit of $1,000.

    After doing a bit of research and thinking about the possible 10% penalty, I decided I’d just contribute to my own individual accounts. It seemed possible they wouldn’t want to go, or college would be cheap online, or college would be free.

    I’m sure glad I opened that account, because now I can superfund that 529 and start contributing to my children’s ROTH IRAs in 2030. They’ll be 16, 14, and 12 years old when they begin receiving ROTH contributions. I just changed my automatic contribution from $0 to $1,400 per month.

    Thank you for writing about this. If I hadn’t known I may have missed this opportunity.

      1. I think everyone with a long-term view of finances should open up a 529 right now, even if they do not have children, and name themselves the beneficiary.

        You can change the beneficiary at a later date. If you’re young, maybe you’ll be able to start contributing to your child’s ROTH the day they’re born.

        You could do this same thing for your grandchildren by setting up a few 529’s way in advance.

  8. Great article. I have a child in college and one currently in 11th grade. Both kids have 529 plans that should cover all undergraduate eligible costs. If there’s something left over, my thinking is to leave it be until they’re sure they won’t be needing some assistance with graduate school. If that’s not needed, then would it be a bad option to let the funds stay invested until one or both have children of their own, and then transfer the residual into that child’s name and build on it? I suppose that even the most aggressive investment options might be conservative relative to other investment options, but it could be a nice way to start off the next generation.

    1. Congrats! And makes sense to me. Very logical moves. It is my plan as well.

      The only recommendation is to get your kids to regularly earn some income now to contribute up to $6,500 in a Roth IRA. Shouldn’t take too much work to do, even at min wage.

  9. You would be better off having your children open their own Roth IRA’s and contributing $6,500 per year (earned income from chores and other business related activities of course). Each child could have over $100,000 in their Roth IRA by the age of 18 without any restrictions of the 529 plan. California 529 plan investment options are very limited and not worth the hassle unless there’s state tax write-offs for contributions.

      1. Under current legislation, there are no income limits to contribute to an after-tax IRA. Also, your children can rollover an after-tax IRA to a Roth IRA penalty free anytime … see “backdoor roth”

        If you have enough money to do a 529 as well, then I would suggest doing an after-tax 401k to Roth IRA conversion, each person is permitted to contribute and rollover $66K (combined employee and employer contributions) per year … see “mega backdoor roth”. This is assuming your children can get a job somewhere and put most of their earned income into their employer 401k plan.

  10. What about kids who already work and contribute to a Roth? Are they subject to the same annual $6500 limit (or whatever for 2024) or is this available on top of that annual limit?

    I plan to consider utilizing this Roth option for my kids since their 529s have been superfunded since 2010. I will then utilize some excess in my pretax retirement to pay for education without penalty and serve as a form of a free Roth conversion to my kids. I’m currently in the process of systemic Roth conversions of my 403b account but try to keep the tax cost to 20% or less per year.

    Eventually my kids should inherit the Roth but I’m trying to reduce my RMD burden by converting pretax now.

    1. It has to be be the max $6,500 contribution limit or whatever the limit is per year. Hence, if your kid is already contributing the limit of $6,500 a year, you can’t roll over anything from the 529 plan. Otherwise, rolling over leftover 529 funds would be the easiest hack to try and contribute $13,000, or the double max a year with tax benefits. If this isn’t the case, I’ll update the post accordingly.

      Nice job super funding in 2010! Their 529s plans must be in great shape.

  11. Thanks for the post. While the change in distribution requirements for inherited qualified accounts for most non-spouse beneficiaries to 10 years in the original SECURE act was a negative for our overall planning, the SECURE 2.0 change allowing some limited 529 balance rollovers to beneficiary Roth IRAs is a small but appreciated give back.

    We started our daughter’s 529 over 15 years ago and have it overfunded by about 60K (considering undergrad only). She is attending a mid-range cost private university and is covering about half of her tuition with merit-based scholarships, and the rest paid from the 529.

    Much about how one feels about spending money for any reason is the mental attitude while doing it. Apart from the tax benefits, knowing that 529 funds were meant to pay large tuition bills, make it easy and painless to do so. (Just like making charitable donations, even when investments are down, are mentally easy when done from a donor advised charitable account.)

    A lesson shared on a 529 mistake…… make sure that the distribution from the 529 is in the same calendar year the college/university receives it – if not, there is a mismatch in information for tax filing. This bit us last year when Spring tuition was sent from the 529 in December 2021, but due to the university not operating over the holidays, not credited to the account until January 2022. The mismatch ended up costing a bit in taxes. A rookie mistake that won’t be repeated!

    1. Very good tip! Thanks for sharing it.

      Congratulations for having enough in the 529 account and the scholarships. The 60K in over funding can easily be used up for graduate school if that is a decision.

  12. I’m curious if the 15 year limit resets when you change beneficiaries as well.

    And I’m confused if you have to qualify for the roth later to roll the money over. So if the beneficiary starts making money that knocks them out of the roth income limit, would this $ not be able to be rolled over?

    Secure Act is being paid for entirely by making Gen X rothify their contributions while benefiting the two groups politicians covet the most…Boomers and Millennials. Really really really sucks how they keep screwing over the Gen X contingent. Enjoy your social security benefit cuts and now forced rothification so close to retirement when the growth matters little. :(

      1. Perhaps you forget Gen Xers and older generations lost a full decade of market returns following the dot com bust beginning in 2000.

        1. Didn’t forget. I was there. Did you see how real estate did from 2000-2006? Incredible! And there is a higher percentage of homeowners than stock owners.

          Where were you and what’s your story?

  13. I’m having a hard time justifying the 529 versus doing a back door Roth. Between my husband and I, the max amount of a Roth seems enough contribution to our kids’ college fund. We both have other Roth options through work if we want. If California provided a tax benefit for 529 contributions, it would be a no brainer. The option in this article is appealing though!

  14. Does this only apply to 529 accounts? We started a Coverdell for our oldest some time ago. (Active duty military..we were worried about getting stationed in a location with bad public schools). Later the rules of the 529 changed but we kept investing the $2000 a year in the coverdell. It’s added up to a good amount thanks to good assignment locations. She also has a 529 that we invest/family gives to. Wondering if we should switch to maxing out the 529 for the future Roth benefits? Still 4 more years to go for college and I’m hopeful she’ll get scholarships and use some of the post 9/11 gi bill.
    This change is awesome for our family!

    1. I haven’t found mention of Coverdell changes in the SECURE Act 2.0 language.

      Being able to contribute $2,000 a year to a Coverdell ESA is better than nothing. However, college is going to be way more expensive in the future. Hence, upping the 529 contribution is likely the optimal move.

  15. Nice! I’m glad they finally are going to add a feature like that. The low lifetime cap is annoying, but it’s understandable. And hopefully it will indeed adjust upwards every 1-2 years. I can’t imagine anyone actually being able to wind up with exactly the rollover amount in excess, but it’s good to know there will be a buffer.

    And gosh – the 15 year requirement is high! Totally glad I started saving early.

    1. The 15 year requirement just seems like an arbitrary, but pointless number to me. But could be 20 or 30 years and wouldn’t really make a difference as long as I outlined in my will when to transfer the funds to a ROTH for my daughter.

      I only started a 529 when my daughter was 7. She will be just graduating college at 22 after 15 years. Even if I couldn’t transfer the funds until she was 30… what’s she gonna do with a ROTH IRA fund in her 20s other than look at the money longingly. Not like she’s gonna retire and collect that ROTH IRA anytime soon.

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