By: Vince DiGiacomo

Imagine saving diligently for your child’s college education, only to watch them earn a full scholarship or choose a different path entirely, leaving a heap of unused funds trapped inside of a 529 College Savings Account and staring down the barrel of taxes and penalties.

Before late 2022, families had few tax-efficient options for dealing with leftover money inside of these accounts. If you wanted to avoid taking the ordinary income tax hit on top of a 10% penalty on earnings, most parents or grandparents would have had to shift the funds to different family members and hope they had some qualified education expenses down the road.

Then came the Secure Act 2.0, a massive bill that was signed into law in December of 2022. This made available the ability to convert unused funds inside a 529 College Savings Account into a Roth IRA for the benefit of the beneficiary for said account, without taxes or penalties.

Sounds like a fantastic strategy, right? Avoid taxes on money that you set aside for your kid’s education that didn’t get used and allow them to get a jump start on an incredible retirement savings vehicle. Well, as always, there’s a catch.

Congress wrote in some pretty strict rules to follow:

  1. The 529 account must have been open for at least 15 years
  2. The money that is being transferred must have been contributed more than 5 years ago
  3. The funds must go directly to a Roth IRA owned by the same beneficiary of the 529 account
  4. There is a $35,000 lifetime limit on the amount you can rollover, however, you cannot exceed the annual Roth IRA contribution limit for the year ($7,000 for 2025)

These conversions also follow the same earned income rules as Roth IRAs. More specifically, the account beneficiary must have earned income, and in any given year you can’t convert more than the lesser of their earned income or the maximum annual Roth IRA contribution limit.

It’s always a fantastic opportunity when you have the ability to contribute to a Roth IRA. Stack that on top of contributing funds inside of a 529 account and you have a way to keep tax free earnings tax free without being restricted to spending on qualified education expenses. If you have questions or a 529 to Roth conversion you’d like to explore, please let us know.