Understanding 529 rollovers to a Roth IRA

A 529 account can be a useful addition to a financial plan for a child's education.

But these accounts sometimes can create uncertainty about what happens to the money used to fund them. After all, the beneficiary may decide not to go to college. Or they may not need the money if they get a scholarship or some other financial aid. They may also decide to go to a cheaper school, or might qualify for employer educational assistance, among other circumstances.

Fortunately, recent legislative changes may put some of these concerns to rest, as distributions from 529 accounts can soon be used to give the same beneficiaries a retirement boost as well. Starting in 2024, you'll be able to convert tax- and penalty-free up to a lifetime limit $35,000 in a 529 to a Roth IRA owned by the 529 beneficiary for at least 15 years, subject to annual Roth IRA contribution limits. (Note: The annual contribution limit and income limits used would be the beneficiary's, not the parent's, and conversions apply only to Roth IRAs, not to traditional IRAs.)

The new provision is part of the SECURE 2.0 Act, passed by Congress at the end of 2022, which overhauled parts of the American retirement system. In addition to the 529 rule, it also increased contribution amounts for older workers into qualified accounts, as well as the age at which retirees must start taking required minimum distributions (RMDs) from such accounts. The legislation also provided a boost to younger workers, allowing for employer matching into retirement accounts for student loan payments, and for the establishment of emergency funds in qualified plans, among other things.

Find out more about SECURE ACT 2.0 in Viewpoints: SECURE 2.0: Rethinking retirement savings.