529 Plan to Roth IRA Conversions and What They Mean for Families

The landscape of education and retirement savings has dramatically shifted with the SECURE 2.0 Act's new provision allowing conversions from 529 college savings plans to Roth IRAs. This change, which took effect in 2024, offers families additional flexibility in managing their long-term financial planning, especially when their children's educational paths diverge from traditional expectations.

Understanding the New Rules

Under the new legislation, unused funds in 529 college savings accounts can now be rolled over into a Roth IRA for the benefit of the 529 account's beneficiary. This provision addresses a long-standing concern among parents: what happens to 529 funds if their child doesn't need all the money for education?

Key parameters of the conversion include:

• Lifetime maximum rollover limit of $35,000 per beneficiary
• Annual conversions are subject to the yearly Roth IRA contribution limits (currently $7,000 for individuals under the age of 50 and $8,000 for individuals 50 or older)
• The 529 account must be open for at least 15 years
• Contributions (and earnings on those contributions) made within the last 5 years cannot be rolled over

Why This Matters for Families

This new flexibility transforms 529 plans from purely educational savings vehicles into more versatile financial planning tools. Consider these scenarios:

1. Scholarship Recipients: If your child earns substantial scholarships, the unused 529 funds can be converted to retirement savings rather than facing penalties for non-qualified withdrawals.
2. The Entrepreneurial Child: Instead of pursuing traditional higher education, your child may decide to start a business. The unused 529 funds can now jumpstart their retirement savings.
3. Trade School or Apprenticeships: When educational expenses are lower than anticipated due to choosing alternative career paths, the excess can be redirected to retirement planning.

Strategic Planning Considerations

The new conversion option adds another layer to family financial planning:

• Early Planning Benefits: Starting a 529 plan early becomes even more attractive, as it ensures meeting the 15-year account requirement for future conversion eligibility.
• Contribution Strategy: Families might consider frontloading 529 contributions, knowing they have the Roth IRA conversion as a backup plan.
• Multi-Generational Planning: The conversion option provides flexibility for changing family circumstances and evolving educational landscapes.

Limitations and Considerations

While this new feature offers significant benefits, families should be aware of certain restrictions:

• The beneficiary's Roth IRA must stay within annual contribution limits
• The beneficiary must have earned income at least equal to the conversion amount
• The 15-year holding period requirement may affect timing decisions

Looking Ahead

This change represents a significant evolution in how families can approach education savings. The ability to convert 529 funds to Roth IRAs acknowledges that success can take many forms beyond traditional higher education. It provides peace of mind to parents/grandparents who want to save for their children's/grandchildren’s education without feeling locked into a single path.

For families already investing in 529 plans or considering starting one, this added flexibility makes these accounts even more valuable as part of a comprehensive financial strategy. It bridges the gap between education and retirement planning, offering a safety net for changing circumstances while maintaining the tax advantages that make 529 plans attractive.

How Alesco Advisors Can Help

At Alesco Advisors, we recognize that legislative changes create new opportunities, and complexities, for families planning for the future. We’re here to help clients understand the most effective ways to save for education, retirement, and long-term family goals.

The content in this blog is provided for informational purposes only, and should not be construed as personalized investment advice.