529 plans are best known as college savings accounts and for good reason. They allow families to invest for future education expenses, and when the money is used for qualified expenses, the growth can generally be withdrawn tax-free.
But recent rule changes have made 529 plans useful in a new way.
Under SECURE 2.0, unused 529 funds may now be eligible to roll into a Roth IRA for the same beneficiary, subject to several important rules. That means a 529 can still help fund education first, but may also provide a limited path to help seed a child’s retirement savings later. Current rules generally allow up to $35,000 of unused 529 funds to be rolled into a Roth IRA for the beneficiary, subject to annual Roth IRA contribution limits, a 15-year account requirement, and other conditions.
That matters because one of the most powerful accounts a young person can have is a Roth IRA. Contributions are made with after-tax dollars, but the money can grow tax-free for decades, and qualified withdrawals in retirement can also be tax-free.
The challenge is that Roth IRAs generally require earned income. Even if parents or grandparents want to contribute on a child’s behalf, the child must typically have qualifying income in that year. The new 529-to-Roth rollover rule does not eliminate that requirement, but it may create a useful planning bridge once the beneficiary begins working. Rollovers still count toward the beneficiary’s annual Roth IRA contribution limit.
Consider a simple hypothetical example.
Suppose a parent or grandparent contributes about $9,000 to a 529 plan when a child is born. If that money grows at a hypothetical 7% annual return, it could be worth roughly $30,000 by the time the child turns 18.
If the child uses the money for college or other qualified education expenses, the 529 has done its job. But if the funds are not fully needed for education, and the account meets the relevant requirements, some of that balance may eventually be eligible to move into the beneficiary’s Roth IRA.
The long-term math can be powerful. If $30,000 eventually makes its way into a Roth IRA and remains invested from age 18 to age 65, assuming a hypothetical 7% annual return, it could grow to more than $700,000.
Of course, this is not a prediction or guarantee. Markets fluctuate, tax laws can change, and the rollover rules must be followed carefully. The 529 account generally must have been open for at least 15 years, recent contributions and associated earnings may not qualify, the Roth IRA must belong to the 529 beneficiary, and state tax treatment may vary.
The takeaway is simple: a 529 plan remains an education-first account. But under the right circumstances, it may also help give your child a meaningful head start on long-term wealth building.
Every family’s situation is different. If you’d like to explore how a 529 plan could support your child’s education — and potentially give them a head start on retirement — contact your Hanover representative.