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 less expensive school, or might qualify for employer educational assistance, among other circumstances.
Fortunately, legislative changes may put some of these concerns to rest, as distributions from 529 accounts can be used to give the same beneficiaries a retirement boost as well. Under certain conditions, you can transfer tax- and penalty-free up to a lifetime limit of $35,000 in a 529 to a Roth IRA opened by the 529 beneficiary.1 The 529 plan must have been maintained for the beneficiary for at least 15 years, subject to annual Roth IRA contribution limits, and transfers must come from contributions made 5 years prior to the transfer date. (Note: The annual contribution limit would be the beneficiary's, not the parents’.)
The provision is part of the SECURE 2.0 Act, passed by Congress at the end of 2022, which overhauled parts of the US 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; for example, allowing for employer matching into retirement accounts for student loan payments, among other things.
Find out more about SECURE 2.0 in Viewpoints: SECURE 2.0: Rethinking retirement savings.
About 529s
529s have numerous tax advantages.
Among them, individual contributions up to $19,000 per year, and $38,000 per married couple, are not subject to the federal gift tax. Additionally, in 2025 and 2026 you can front-load a 529 plan (giving 5 years' worth of annual gifts of up to $19,000 at once for a total of $95,000 per person, per beneficiary, or $190,000 combined for spouses who gift split) without having to pay a gift tax.2
The money in the account can also grow tax-deferred, and you may contribute up to the 529 plan's maximum aggregate limit, which varies by state. While there are no federal deductions for 529s, some states offer deductions on in-state plans. Others may offer tax breaks on 529 plan contributions in any state, or may use a tax credit. You should check your home state plan or the beneficiary's for potential state tax advantages.
Find out more about potential 529 advantages in Viewpoints: 5 surprising benefits of 529 plans.
529s, penalties for nonqualified expenses, and Roth distributions
Given the expense of higher education today, it may seem like a stretch that money in a 529 would go unused. Nevertheless, if you or the account's beneficiary decide to use the account funds for nonqualified expenses, you may be subject to income tax and a 10% federal tax penalty on any earnings associated with the distribution. That's where a transfer to a Roth IRA could make sense. However, there are several things to consider before going ahead with such a transfer.
- The 529 plan must have been maintained for the designated beneficiary for at least 15 years. (Separately, the Roth IRA also must be established in the name of the designated beneficiary of the 529 account.)
- The amount transferred from a 529 account to a Roth IRA in the applicable year, together with all other IRA contributions for the tax year for the same beneficiary, must not exceed the Roth IRA annual contribution limit applicable to the beneficiary. The Roth contribution limit for 2026 is $7,500 for those under 50, with an additional $1,100 catch-up contribution for those age 50 and older.
- Additionally, the transfer amount must come from contributions made to the 529 account at least 5 years prior to the transfer date and the aggregate amounts transferred from 529 accounts to all Roth IRAs must not exceed $35,000 per beneficiary.
Good to know: You can change the beneficiary of the 529 account to another eligible individual, such as a child, grandchild, or eligible relative to fund an education. However, if the child is in a younger generation than the original designated beneficiary, the funds may be considered a gift for tax purposes. You should consult with a tax professional regarding your specific circumstances.
Meet Carol
Let's look at a hypothetical example. Carol is 22, and her parents have set up a 529 account for her, with total plan assets of $30,000 ($20,000 in contributions, and $10,000 of gains.)
Rather than attend college or a qualifying vocational school, she decides to work as a freelance graphic designer. So she does not use the funds her parents set aside for her in a 529 plan.
If the 529 funds are not used for qualified educational expenses, Carol may be subject to federal income taxes and a 10% federal penalty tax on any earnings associated with the distribution.
Potential taxation on a nonqualified 529 distribution
| Tax rate | 25% |
|---|---|
| Penalty rate | 10% |
| Total taxes | $3,500 |
Carol's parents can convert the excess assets (up to a lifetime limit of $35,000) into a Roth IRA for Carol tax-free. Due to annual contribution limits, this strategy would take multiple years to fully transfer the remaining 529 plan assets.
Transferring assets from Carol's 529 to a Roth IRA
IRA contribution limit: $7,500 for 2026
| Year | Rollover contribution to a Roth IRA | Balance |
|---|---|---|
| Year 1 | $7,500 | $7,500 |
| Year 2 | $7,500 | $15,000 |
| Year 3 | $7,500 | $22,500 |
| Year 4 | $7,500 | $30,000 |
Over time, the $30,000 may provide a boost to Carol's retirement savings.
Carol's Roth IRA assets over time
| Carol's age | 26 |
| Carol's retirement age | 67 |
| Carol's Roth assets | $30,000 |
| Hypothetical rate of return | 7% |
| Carol's assets at retirement | $480,680 |
Income considerations for 529 rollovers
Regular Roth contributions have modified adjusted gross income limitations. But such limits do not seem to restrict the 529-to-Roth IRA—per current readings of SECURE 2.0. However, the IRS has not issued guidance on this legislation but is anticipated to do so in the future, which may result in interpretative changes.
Still, there may be instances where the 529 owner is not eligible to transfer the full amount of the annual Roth IRA contribution limit from the 529 because the 529 beneficiary had no income during a calendar year, or made the maximum contributions to a Roth IRA or a traditional IRA during the same calendar year. Again, final guidance from the IRS is pending.3
Further guidance from the IRS may clarify or change the interpretation of the legislation. So it's always best to consult with a financial or tax professional regarding your specific circumstances. In the meantime, your 529 account now has more options, whether that's paying for school or helping your 529 beneficiary save for retirement.