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Rolling Over A 529 Account To A Roth IRA

One of the most frequently asked questions about 529 plans is “What happens if my beneficiary doesn’t go to college?” There is a perception among many people that money in a 529 plan is trapped if the beneficiary doesn’t need it. This is because earnings (but not principal) withdrawn from a 529 plan that aren’t used for qualified education expenses might be subject to income tax and penalties. But 529 plans offer great flexibility to avoid this possibility. The latest feature comes via recently passed legislation known as SECURE 2.0. Starting in 2024, the unused portion of a 529 account can be rolled over to a Roth Individual Retirement Account for the beneficiary, thereby providing additional retirement savings.

The ability to rollover a 529 plan to a Roth IRA is just one of many options families have when a beneficiary doesn’t use all of the money saved. For example, the account owner could change the beneficiary to another “family member,” a broadly defined term that includes not only siblings of the beneficiary, but other relatives and even descendants. Alternatively, the balance can be used to pay off student loans held by the beneficiary or a sibling.

And just because the beneficiary of a 529 plan may not attend college, money in the account can still be used for his or her benefit. In addition to four-year college expenses, 529 plans can be used to pay for many forms of education, including vocational training, trade schools, apprenticeships, community colleges, and, in some states, K-12 tuition.

When it comes to saving for education, 529 plans offer great benefits such as the potential for tax-free growth. And with SECURE 2.0, 529 plans are even more flexible with the opportunity to convert to retirement savings.

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