Over the past few years, significant changes have been made to the U.S. tax code regarding retirement planning. One of the most recent and impactful changes is the passing of the 2022 SECURE Act 2.0, which contains many provisions that will affect savers, including a modification to 529 accounts.

Under this new provision, a portion of the unused balance in a 529 account can now be transferred to a Roth IRA for the 529 beneficiary, making 529s even more flexible for college savings. This change reduces the risk of overfunding the account if a child qualifies for scholarships or other financial aid and provides a new option for repurposing funds if a child chooses not to pursue a traditional college education.

The rules around transferring funds from a 529 to a Roth IRA are specific and will go into effect in 2024. The following conditions must be met to take advantage of this opportunity:

  • The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan;
  • The 529 plan must have been maintained for 15 years or longer;
  • Any contributions to the 529 plan within the last 5 years are ineligible to be moved to a Roth IRA;
  • The annual limit for how much can be moved from a 529 plan to a Roth IRA is the lesser of the IRA contribution limit for the year ($6,500 in 2023 if under age 50) or the amount of the beneficiary’s earned income, less any ‘regular’ traditional IRA or Roth IRA contributions that are made for the year (in other words, no doubling up with funds from outside the 529 plan);
  • The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.

Let’s use an example to illustrate how the new rule works. Jack was born in 2000, and his parents opened a 529 plan for him. They regularly contributed to the plan until Jack graduated from high school in 2018. Jack then attended college and received his bachelor’s degree in 2022. At that time, the 529 plan had a leftover balance of $30,000.

Starting in 2024, Jack’s parents can transfer the remaining balance from his 529 plan to a Roth IRA account in his name. The transfer must be handled by the 529 plan administrator and sent directly to Jack’s Roth IRA custodian to qualify.

Jack’s family needs to be aware of a few limitations. Since his account was established more than 15 years ago and no contributions will have been made within five years of the first transfer in 2024, he is only limited by the annual Roth IRA contribution limit and whether he has enough earned income to qualify for a Roth contribution.

Assuming the Roth IRA contribution limit in 2024 stays at $6,500, and Jack has at least $6,500 in earned income that year (and has not made any contributions to a traditional IRA or Roth IRA), a rollover of $6,500 may be initiated from his 529 to his Roth IRA. The income limits for Roth IRA contributions will not apply in this case.

The rules for the new 529 Roth IRA rollover are generally clear. However, Congress has not clarified whether changing the beneficiary of a 529 account will trigger a new 15-year “holding period” before transferring the funds to a Roth IRA. Overall, the new 529 transfer rule provides greater flexibility in saving for children’s education by eliminating the need to predict future college costs down to the last dollar. Moreover, it incentivizes early college savings by allowing a portion of leftover college funds to bolster a child’s retirement savings in the future.