Meridian Blog

Some might call it a champagne problem, but overfunding a 529 College Savings plan can be a concern for some parents and grandparents. Until recently, the options for using leftover funds were somewhat limited. You could change beneficiaries to another family member, but if you just took a withdrawal for non-college related expenses, the owner of the 529 could face taxes and penalties on the growth portion (not what was contributed) of the account.

Some clients have voiced concerns around 529 college savings plans: “What happens if my child doesn’t use all the money?” Maybe your child receives a scholarship. Maybe they attend a less expensive school than expected, or perhaps they simply don’t need everything you and/or your family members saved.

Thanks to a change made by the SECURE 2.0 Act, families now have another option: certain unused 529 plan dollars can be rolled into a Roth IRA for the beneficiary.

Beginning in 2024, federal law allows qualifying assets in a 529 plan to be transferred directly into a Roth IRA owned by the 529 beneficiary. When the requirements are satisfied, the transfer can be completed without the federal income taxes and penalties that can accompany a non-qualified 529 withdrawal.

There are, however, several important rules. See the flowchart below to see if your 529 funds might qualify or read on for some bullet points around the guidelines.

• The 529 account must have been open for at least 15 years before a qualifying rollover can occur. This is an important reason to consider opening a 529 while children are young—even if you initially fund it with a relatively modest amount.
• There is a $35,000 lifetime limit. A maximum of $35,000 per beneficiary can be transferred from 529 accounts into Roth IRAs under this provision over the beneficiary’s lifetime.
• Annual IRA contribution limits still apply. For 2026, the annual IRA contribution limit is $7,500, or $8,600 for someone age 50 or older. Importantly, the 529 rollover shares that annual limit with the beneficiary’s other traditional and Roth IRA contributions. For example, suppose your 25-year-old daughter is the beneficiary of a qualifying 529 account. If she has not made any other IRA contributions in 2026, as much as $7,500 could potentially be transferred from her 529 into her Roth IRA. If she had already contributed $2,500 to an IRA herself, however, the remaining available amount would generally be only $5,000.
• The beneficiary generally needs earned income. The beneficiary should have compensation of at least the amount being transferred for the year. For example, someone who earns $5,000 generally shouldn’t expect to move the full $7,500 annual limit from a 529 into a Roth IRA.
• Recent 529 contributions can’t immediately be rolled over. The rules are designed to prevent someone from simply putting money into a 529 and immediately moving it into a Roth IRA. Amounts contributed during the five-year period preceding the rollover, and earnings attributable to those contributions are not eligible for the special rollover.
• The money must go to the beneficiary’s (not the parents’) Roth IRA. For a young adult, getting $30,000 into a Roth IRA early in life could be significant. If $30,000 were invested at age 25 and hypothetically earned an average of 7% annually, with no additional contributions, it would grow to roughly $449,000 by age 65.

For parents and grandparents considering 529 plans, this additional flexibility can make starting an account early even more attractive. For families with existing 529 accounts and children approaching or finishing college, it’s worth reviewing account balances, contribution history, account age and the beneficiary’s earned income before deciding what to do with leftover funds.

I would add that because this is a relatively new option, some companies aren’t fully equipped to execute the transactions, and the process can be manual and bulky. As time goes on, the process of moving 529 funds to a ROTH should become much easier.

My son is flipping out over the 529 to ROTH option