Rollover Unused 529 Funds

The SECURE Act 2.0 made a lot changes that could impact your financial strategy, including being able to rollover unused 529 money into a Roth IRA.


FEDZONE Ed Zurndorfer

Edward A. Zurndorfer

Over the last 30 to 40 years, 529 college savings plans have helped millions of American families save for higher education in a tax-beneficial way. One of the provisions of the recently passed SECURE Act 2.0 is legislation that makes 529 college savings plans more attractive. The legislation addresses a tax issue that has concerned 529 college savings plan participants and their financial advisors.

In particular, the tax issue involves individuals (for example, parents and grandparents) who contribute excess funds into a 529 college savings plan on behalf of their beneficiaries. When these individuals extract any excess funds not used to pay for qualified higher education expenses, a portion of the excess funds would be subject to federal and state income taxes and an early withdrawal penalty.


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As a result of the SECURE Act 2.0 passage, starting January 1,2024 some unused 529 college savings plan funds can be rolled over to a Roth IRA (untaxed and unpenalized) once the 529 plan beneficiary has ceased withdrawing money for qualified higher education expenses. For college graduates, this means getting a valuable start for their future retirement.

The new rule applies to 529 savings accounts held by many types of individuals, including grandparents who contribute to 529 savings plans for their grandchildren beneficiaries. Grandparent-owned college savings 529 plans have increased in popularity in recent years. This trend may be strengthened by the SECURE Act 2.0 passage. This column explains the details of how unused 529 college savings funds can be rolled over to a Roth IRA.

Understanding How 529 College Savings Plans Work

Contributions that are made by an individual (the “investor”) are made with after-taxed dollars on behalf of a beneficiary. A beneficiary could be a child, niece, nephew or a grandchild. The contributions made to a 529 college savings plan are typically invested in a brokerage account. When money is withdrawn from a 529 college savings plan, the contributions are not taxed. This is because the contributions were previously taxed before they were contributed to the 529 plan. The accrued earnings will not be taxed when withdrawn provided they are used to pay for qualified higher education expenses. In this way, savings for college can potentially yield tax-free growth. There may also be state tax advantages if the 529 college savings plan is sponsored by an individual’s residence state.

One potential problem is associated with investing in a 529 college savings plan. If for some reason the 529 beneficiary does not use up all of the accumulated funds in the 529 plan by the time he or she graduates and does not intend to continue his or her education (or leaves a college or university before graduating), then what happens to the unused 529 funds? Once the beneficiary no longer has qualified higher education expenses, any further distributions from the 529 plan will likely be non-qualified, subject to federal and state income tax and a 10 percent penalty.

How a Rollover of Unused 529 Funds to a Roth IRA Can Avoid Taxes and a Penalty

If the requirements as discussed below are met, unused 529 savings plan funds can be rolled over to a Roth IRA without triggering income taxes and a 10 percent penalty. The following example will illustrate:

Example 1. Alicia entered college as a first-year student in September 2018. She was the beneficiary of a $120,000 529 college savings plan that was funded by her grandfather who contributed a total of $95,000. During the next four years, $100,000 of the $120,000 was withdrawn from the 529 account to pay for Alicia’s college expenses, tax-free as qualified higher education expenses. When Alicia graduated in June 2022, she decided to enter the work force without subsequent higher education. If the requirements as detailed in SECURE Act 2.0 are met, then the excess $20,000 in Alicia’s 529 savings plan could be taken out of the 529 account and rolled over to  a Roth IRA for Alicia. Alicia would have years of potential tax-free growth ahead of her. This would be an excellent way for Alicia to start saving for her retirement. But to achieve this outcome, several requirements must be met. These requirements are now explained.

15-year 529 Account Ownership Requirement

In order to perform a 529 college savings plan to Roth IRA rollover, the 529 account must have been in existence for at least 15 years. This means that it can make sense for a parent or a grandparent to open a 529 account on behalf of a child or a grandchild who is younger than age 7 when the 529 account is opened. In so doing, the child or grandchild would meet this 15-year requirement soon after the child or grandchild graduates from a college or a university at age 22. But opening a 529 account for a child or a grandchild may have merit as illustrated in this example:

Example 2. In Example 1, Alicia’s 529 account was opened up by her grandfather when she was 10 years old. Alicia ended her higher education after earning an undergraduate degree when she was age 22.

Alicia’s 529 account can remain in place for another three years with no taxable non-qualified distributions. Any potential investment gains during this three-year period would grow potentially untaxed. Once the 529 plan reaches the 15-year mark and Alicia reaches her 25th birthday, Alicia can initiate Roth IRA rollovers.

Roth IRA Rollover Annual Limits

Upon fulfilling the 15-year 529 account ownership requirement, a 529 account beneficiary is limited as to the amount of the 529 account that can be rolled over to a Roth IRA from one year to the next.

The annual rollover limit falls into the rules for annual Roth IRA contribution limits. During 2023, the maximum Roth IRA contribution is $6,500. Suppose (for illustrative purposes) the inflation-indexed cap maximum contribution to a Roth IRA is $8,000 for individuals under age 50 during the year 2025. If so, up to $8,000 of 529 account money could be rolled over to a Roth IRA during 2025. Another possibility is that Alicia may decide to rollover $3,000 of her unused 529 account during 2025 to a Roth IRA and contribute $5,000 to a deductible traditional IRA or to another Roth IRA. Current factors including cash flow needs and possible deductions for IRA contributions, could determine Alicia’s annual allocation of rollover or contributions to a Roth IRA.

Another limitation is that the amount of the 529 college savings account rollover to a Roth IRA in any year cannot exceed the 529 account beneficiary’s earned income (salary/wages) for that year.

Maximum 529 College Savings Plan Rollover Amount is $35,000 with No Indexing to Inflation

Under SECURE Act 2.0, the maximum amount that can be rolled over from a 529 college savings account to a Roth IRA is $35,000 per beneficiary. There is no indexing over time due to inflation for the $35,000 amount.

Suppose the maximum Roth IRA contributions during the years 2024 and 2025 is $7,000, increasing to $7,500 during the years 2026, 2027 and 2028. The 529 beneficiary could then rollover $7,000 each year during 2024 and 2025, rollover $7,500 each year during 2026 and 2027, and rollover $6,000 during the year 2028, for a total rollover of $35,000. Alternately, $5,000 of the 529 college savings funds can be rolled over for seven years. This could allow for annual Roth IRA contributions as well, assuming the 529 beneficiary is eligible.

Finally, SECURE Act 2.0 does not address the issue of successor 529 beneficiaries. For example, in the example of Alicia above, suppose that while Alicia was rolling over the $20,000 to her Roth IRA ongoing appreciation on funds remaining in the 529 account resulted in $5,000 left in the 529 account. If Alicia’s grandfather then changes the 529 beneficiary to Alicia’s sister Oliva, will Oliva be able to rollover up to $35,000 to a Roth IRA in her name? Another related question: Will a new 15-year waiting period will take effect before Olivia can perform a 529 to Roth IRA rollover tax and penalty-free? It is not clear that SECURE Act 2.0 answers these questions. Hopefully future IRS guidance will answer these questions as well as provide additional information on the details of 529 college savings plan rollovers to Roth IRAs .


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Disclaimer: As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Rollover Unused 529 Funds

Rollover Unused 529 Funds