Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / 529 Plan Rollovers to Roth IRAs After the SECURE 2.0 Act
Transcript
- Lucas: So Luna, we have talked a lot about 529 plans on this show — how to use them, how not to use them, how grandparents fit in. But there is one change from the SECURE 2.0 Act that I think is still flying under the radar for most families. Luna: Which one? Because there were a lot of provisions in that bill. Lucas: The ability to roll over unused 529 plan funds into a Roth IRA for the beneficiary. It became effective in 2024, but I am not sure how many families have actually taken advantage of it yet. Luna: Right, that was a big deal when it passed. But the rules are pretty specific, right? It's not like you can just dump the whole account into a Roth. Lucas: Exactly. There are several guardrails. First, the 529 plan must have been open for at least 15 years. So if you opened one when your child was born, you are looking at age 15 at the earliest before you can do a rollover. Luna: And the rollover itself is subject to the annual Roth IRA contribution limits, correct? Lucas: Yes. The annual rollover cannot exceed the Roth IRA contribution limit for that year — which is $7,000 for 2026, or $8,000 if the beneficiary is 50 or older. But there is also a lifetime cap of $35,000 total that can be rolled over from a single 529 plan. Luna: So you cannot just roll over $100,000 even if the 529 has been open for 20 years. Lucas: Correct. And the beneficiary must have earned income at least equal to the rollover amount. So if your child is in graduate school and doesn't have a job, that rollover might not be possible that year. Luna: That is a key point. The Roth IRA rules still apply — the rollover counts as a contribution, so it requires earned income. Lucas: Exactly. And the rollover cannot exceed the beneficiary's taxable compensation for that year. So if your kid earns $3,000 from a summer job, you can only roll over $3,000 into the Roth, not the full $7,000. Luna: But wait — does the $35,000 lifetime cap apply per beneficiary or per 529 plan? Because if a grandparent also has a 529 for the same child, can you roll over from both? Lucas: The cap is per beneficiary. So across all 529 plans for the same child, the total rollover cannot exceed $35,000. But the 15-year clock is per account. So if a grandparent opened a 529 for the grandchild later, that account would need to meet its own 15-year requirement. Luna: That makes sense. So planning ahead is crucial — opening accounts early even if you are not sure the child will attend college. Lucas: Precisely. And this is where the strategy gets interesting. Many families overfund 529 plans to maximize state tax deductions, or they simply save more than the child ends up needing. Before SECURE 2.0, the only options were to either leave the money in the account for a future beneficiary — say a sibling or a grandchild — or take a nonqualified withdrawal and pay taxes plus a 10 percent penalty on the earnings. Luna: Now there is a third option, and it's a much better one for many families. Lucas: Let me give you a concrete example. Suppose a family in a state with a state income tax deduction contributes to a 529 plan for their daughter starting at birth. They contribute $10,000 a year for 18 years. That is $180,000 in contributions, plus earnings. The daughter gets a full scholarship to a state university, so total qualified expenses are only $60,000. Now there is $120,000 plus growth left in the account. Luna: That is a lot of money. Without the rollover, they would be stuck. Lucas: With the rollover, they can move up to $35,000 into a Roth IRA for the daughter over five years — assuming she has earned income each year. That covers some of the excess. The rest could be used for a sibling, a future grandchild, or even taken as a nonqualified withdrawal — though that would trigger taxes and penalties on the earnings portion. Luna: But the key is that the Roth IRA rollover is tax-free and penalty-free, as long as the rules are followed. Lucas: Exactly. And that Roth IRA then grows tax-free for the beneficiary's retirement. It is a really powerful way to repurpose overfunded education savings without waste. Luna: One thing I want to clarify — does the rollover count against the Roth IRA contribution limit for the beneficiary? Because if they are also contributing to a Roth IRA from their job, can they do both? Lucas: The rollover does count as a contribution. So if your daughter is contributing $3,000 from her summer job to her Roth IRA, you can only roll over the remaining $4,000 from the 529 plan, assuming she has $7,000 of earned income total. Luna: That is important for coordination. If she is maxing out her Roth IRA, you cannot also do a rollover in the same year. Lucas: Right. And there is another nuance: the 529 account must have been opened for at least 15 years. If you change the beneficiary of the 529, the clock resets for that account. So you cannot just move the account to a new beneficiary and then immediately roll over. Luna: That reset rule is tricky. So if you want to roll over for a child, you should open the account in their name early and leave it. Lucas: Yes. And contributions made in the last five years cannot be rolled over. So if you add money to the 529 in 2024, that portion cannot be rolled over until 2029. The rule is designed to prevent people from using the 529 as a tax-free Roth IRA contribution vehicle. Luna: That makes sense. Otherwise, high-income earners could just contribute to a 529, get a state tax deduction, and then roll over into a Roth IRA, effectively bypassing income limits for Roth contributions. Lucas: Exactly. The 15-year rule and the 5-year holding period for contributions prevent that kind of gaming. But for families who have genuinely saved for college and have leftover funds, this is a huge win. Luna: Let's talk about who benefits most from this. I think families with multiple children, or those who started saving very early, are the prime candidates. Lucas: Definitely. Also grandparents who set up 529 plans for grandchildren. They often overfund because they want to be generous, but then the grandchild gets a scholarship or doesn't go to college. Now they can roll over the excess into the grandchild's Roth IRA. Luna: But remember, the grandchild needs earned income. So if the grandchild is in high school and doesn't have a job, you might have to wait. Lucas: Right. And the $35,000 lifetime cap applies. So it's not a complete solution for very large overfunding, but it is a meaningful step. Luna: Speaking of meaningful steps — you know, Lucas, conversations like this one remind me why we do this show. We try to help people make smarter decisions with their money, and sometimes that means knowing about a specific rule change that can save them thousands. Lucas: Absolutely. And honestly, listener support is what keeps this podcast ad-free and focused on exactly these kinds of actionable details. If our money conversations have helped you think about a decision differently, you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep us going. Luna: And it really does make a difference. Even a small contribution helps us cover hosting costs and research time. We appreciate every bit of support. Lucas: Now back to the rollover strategy. One more thing: if the beneficiary is a special needs individual, the rules might interact differently with ABLE accounts. But that is a topic for another episode. Luna: Good point. We should cover that separately. For now, let's focus on the basics. Lucas: So to summarize: the SECURE 2.0 Act allows a rollover of up to $35,000 from a 529 plan to a Roth IRA for the beneficiary, subject to the annual Roth contribution limit and the requirement that the beneficiary has earned income. The 529 must have been open for 15 years, and contributions from the last five years are ineligible. Luna: That is a lot of conditions, but for families who meet them, it is a fantastic planning tool. Lucas: And it changes the calculus for how much to save in a 529. Previously, the fear of overfunding led many families to under-save. Now there is a safety valve. Luna: I think we will see more families contributing aggressively to 529 plans, knowing they can pivot the excess to retirement savings if needed. Lucas: One caution: don't contribute more than you can afford just because of the rollover option. The $35,000 cap is real, and the rules are strict. Luna: And don't forget that the rollover is only for the earnings portion? Or can you roll over contributions too? Lucas: You can roll over both contributions and earnings. The entire rollover amount is treated as a Roth contribution for tax purposes. But remember, contributions to the 529 were made with after-tax dollars, so rolling them into a Roth is not a double tax benefit. Luna: Right, that makes sense. So there is no tax deduction on the way in for federal, but state deductions may apply. Lucas: Exactly. And the rollover itself is not taxable. So it's a clean transfer of funds from one tax-advantaged account to another. Luna: What about the impact on financial aid? If you roll over a 529 to a Roth IRA, does that count as an asset on the FAFSA? Lucas: That is a good question. A Roth IRA owned by the student is counted as an asset on the FAFSA, but at a lower rate than a 529 plan owned by the parent. However, the 529 plan owned by a parent is counted as a parent asset, which has a lower impact on aid than a student asset. So it's a trade-off. Luna: So families should consider the timing. If the student is still in college, rolling over might reduce aid eligibility. Lucas: Right. Ideally, you would wait until after the student graduates and is no longer applying for financial aid. But if the 529 is overfunded and the student has earned income, it could still be worth it. Luna: Let me ask you this: can you roll over from a 529 plan to a Roth IRA for a beneficiary who is not your child? Say a niece or nephew? Lucas: Yes, as long as the beneficiary is a designated beneficiary of the 529 plan. The rollover rules apply to any beneficiary, not just a child or grandchild. However, the 15-year clock runs from when the account was opened for that beneficiary. If you change the beneficiary, the clock resets. Luna: So if you open a 529 for your niece at birth, you can roll over for her after 15 years, provided she has earned income. Lucas: Correct. And that is a great way for aunts and uncles to contribute to a child's future without worrying about overfunding. Luna: I think the biggest takeaway is that the 529 plan has become more flexible than ever. It is not just for college anymore — it is a multigenerational savings vehicle with a retirement kicker. Lucas: Exactly. And that flexibility should encourage more families to save, knowing they have options. The key is to start early, keep good records, and understand the rules. Luna: For our listeners who want to explore this further, I would recommend checking the IRS guidance on SECURE 2.0 and talking to a tax professional. Lucas: Absolutely. And we will link to some resources in the show notes. For now, I think we have given everyone a solid foundation on this new rollover strategy. Luna: Agreed. Thanks for joining us, and we'll see you next time. Lucas: Take care, everyone.