Sedona Arizona

529 plans ➠ Roth IRAs?

Big changes are coming in 2024 to 529 plans and Roth IRAs. More importantly, for the first time ever these two savings vehicles will soon have a direct link.

Here’s a brief overview of what to expect in planning for future education savings.

The recently passed (December 23, 2022) $1.7 TRILLION federal omnibus spending package included a lot of changes for retirement accounts. Welcome to SECURE Act 2.0.

One of such changes includes tax- and penalty-free rollovers from 529 plans to Roth IRA accounts beginning in 2024. This will be a big change in education savings strategy for a lot of people.

As with anything that looks like a benefit from government, there are multiple hurdles and strings attached.

There are limitations

A few points and limitations you should know:

  • Places a lifetime cap on rollovers from 529s to Roth IRAs of $35,000
  • Rollovers are subject to the annual Roth IRA contribution limits
    • $6,500 in 2023
    • $1,000 “catch-up” contributions is also allowed for those age 50+
    • Limits are subject to change annually
  • The language of who’s Roth IRA the money can be rolled to is a little ambiguous
    • Rollover may be required to go to the 529 beneficiary (i.e. the child)
  • 529 accounts must have been opened for at least 15 years prior to the rollover
  • Contributions and earnings on contributions made in the last 5 years can’t be rolled over
  • Rollovers typically have a 60-day window… not this time. Rollovers must go DIRECTLY to the beneficiary’s Roth IRA in like-kind

A few points we need more clarification around:

  • Can the rollover go to the custodian (i.e. parent/grand-parent) Roth IRA if the parent makes themselves the 529 beneficiary?
  • Will changing the beneficiary restart the 15 year clock?
  • Is the “contributions and earnings within 5 years” limitation based only on years prior to 2024, or is the limitation portable to the 5 years prior to a future rollover?

Brief primer on 529 plans

According to, the original 529 plans were created by states such as Florida, Michigan, Ohio and Wyoming in the late 1980’s. Since that time, over twelve million families have saved more than $258 billion.

The Senate Finance Committee said “Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education.”

529 plans are state-sponsored, and most states offer at least one plan. You are not limited to only your state’s plan; however, many states offer special tax benefits to residents investing in the plan. At the same time, you are able to invest in a different state’s plan if the options are better.

You can review your state’s 529 options here.

Why 529 plans can be awesome

The biggest reason: Tax-free savings and distributions! Plus, 529 plans do not have annual contribution limits, though contributions can be subject to gift tax rules – more on that below.

Investments in 529 plans grow completely tax- and penalty-free as long as the funds are used for qualifying education expenses. For savers who start early and make regular contributions, a good investment mix growing over 18-20 years can create a significant savings.

Annual average in-state college tuition is estimated to be a little more than $12,000! Assuming an “average” inflation rate of 6-8% (yes, that’s the number!), a four year tuition bill can easily exceed $100,000 in future dollars.

A 529 plan invested over 18 years earning a steady 6% per year with monthly contributions of $300 might be enough to cover this cost. Even if you aren’t able to save at that rate or you’re getting a late start, the key is to start. Every dollar going into the account has the opportunity to reduce the burden of education costs with tax-free investment growth.

Money in a 529 plan can be used for other education, including trade and technical/speciality schools, community colleges, grad school, law school, med school, and other qualifying certificate programs.

Why 529 plans can be cumbersome

Under current rules, a common concern for many savers is over-funding a 529 plan. This would most-likely happen if the beneficiary child received alternate funding, such as a scholarship or grant. In that case, the 529 custodian (i.e. parent/grand-parent) must declare a different beneficiary.

Another option is to withdraw the money by carefully following the non-qualified withdrawal rules to avoid penalties. You’ll still have to pay taxes on any portion of the withdrawal that is earnings!

Adding another wrinkle, contributions to a 529 plan are considered completed gifts for federal tax purposes! Gift tax limits in 2023 exclude up to $16,000 per donor ($16,000 in 2022), per beneficiary.

What if your child finishes high school and decides to start a business or go directly into the workforce? This is another potential short-fall of the current 529 rules.

How to save for college

Because of this, parents are often faced with figuring out how to save for college. In some situations, saving for college requires some hedging strategies. As an example, parents saving for college may split savings between 529 plans and other account types. By doing this, it allows the parent to easily repurpose the funds for their own retirement or spending.

Popular choices for this may include parent-owned Roth IRA accounts, which allow access to contributions tax and penalty-free after 5 years. If the child receives funding from another source, no harm – the parent simply keeps the money invested for their own retirement. Any withdrawals from that Roth-IRA would simply follow rules for Roth-IRAs, which do have a few tax- and penalty-free exceptions.

Another option is taxable brokerage investments accounts. Here, the account owner is saving and investing money in an account that has the most flexibility. While earnings are taxable to the owner(s), there are no limitations on how much can be saved or withdrawn, no matter the reason or timing. If the child receives funding from another source, no harm – the parent simply keeps the money invested for their own use.

Additional options may include Uniform Transfer to Minors Act (UTMA) accounts or even life insurance. These account types have their own wrinkles and short falls, including the requirement of UTMA accounts to become full, unfettered property of the child once they attain the age of majority. Plus, these accounts have exposure to Kiddie-Tax rules.

Life insurance contracts may or may not be efficient ways to save, depending on the type of policy. Of course, life insurance should never be considered an investment vehicle.

In the meantime…

As more details and clarification is released by Congress, we’ll determine the attractiveness – or not – of this 529 plan to Roth IRA rollover option. There is, of course, criticism from some who believe this is simply another way for wealthier savers to benefit. This remains to be seen, as anyone can save to a 529 plan. Also, this bill has many changes to retirement savings accounts, including Roth-IRAs, to provide increased savings options for most Americans.

Have questions about the best way for your family to save for college? Life Moves Wealth can help.

Want to know more about working with Life Moves Wealth for your financial advice needs? You might be a great fit – click here to learn more!


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Author: Dale Shafer II, CFP®, APMA®, CDFA®

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