For years, 529 college savings plans have been one of the most effective tools for families to save for higher education. Contributions grow tax-deferred, and withdrawals are tax-free when used for qualified education expenses like tuition, fees, and room and board. But a recent rule change has added a new layer that makes 529 plans even more versatile.
Step One: Fund College the Smart Way
The primary benefit of a 529 plan hasn’t changed: money you contribute can be invested and allowed to grow over time, free from federal taxes. Most states also offer tax deductions or credits for contributions, further boosting your savings power. The earlier you start, the more you can take advantage of compounding, and the more flexibility you’ll have when college bills arrive.
Step Two: Roll Over Unused Funds to a Roth IRA
Thanks to the SECURE 2.0 Act, as of 2024, you can roll over up to $35,000 of unused 529 funds into a Roth IRA for the plan’s beneficiary, without taxes or penalties. This is a game-changer for families worried about overfunding a 529 plan or for students who receive scholarships, attend a less expensive school, or choose not to pursue college at all.
There are rules to keep in mind:
- The 529 account must have been open for at least 15 years.
- Annual rollovers count toward the Roth IRA contribution limit ($7,000 in 2024).
- The beneficiary must have earned income to contribute to a Roth IRA.
Why This Matters
This new flexibility removes one of the main concerns about 529 plans—the fear of “locking up” money for education. Now, any leftover funds can give your child a head start on retirement savings, potentially compounding for decades.
For example, if $10,000 is rolled into a Roth IRA at age 23 and earns a 7% average annual return, it could grow to over $150,000 by age 65, completely tax-free.
The Bottom Line
If you’ve been hesitant to open or contribute to a 529 plan, this change makes them more attractive than ever. By thinking ahead, you can turn one smart savings move into two—helping with college today and retirement tomorrow.