This year marks a new horizon for both college and retirement savers alike.

As a result of the Secure 2.0 Act, Americans have a new choice in their financial toolbox: In 2024, you can roll money from a 529 college savings plan into a Roth IRA that has been created in the name of the beneficiary.

For families with overfunded 529 accounts, this may be an easier choice on the surface. But it’s not just a matter of switching your focus from dorm room to forever home. Rules around the rollover and tax treatment make this thought process deeper than just your end goals. Here’s a quick look at what this money move could mean for you now -- and down the financial road.

Checking on your 529 plan

529 education savings plans have been a popular way for families to aside money for a beneficiary’s future education expenses. Upfront contributions into the plan may not serve as an income tax deduction, but a benefit for savers is that earnings within the plan can grow free of federal taxes and are not taxed upon withdrawal – as long as the funds are used for qualified education expenses.

It’s a good practice to monitor the balance in a 529 account, as market fluctuations and contributions from family members can change the performance of the account over time.

Having open, honest conversations with family members around money and education will also keep your savings on track, since 529 plans have strict policies around what the funds can go toward (without the need to pay additional taxes and withdrawal penalties).

The shifting landscape of higher education may change what your beneficiary has in mind for the future: In 2022, 23% of American adults aged 25 and older had a bachelor’s degree as their highest degree, while only 14% had finished advanced education like a professional degree, master’s degree or doctorate.¹

For families where this future spend may not happen or the amount of applicable expenses is not as high as the total amount in the account, it’s a logical question to wonder where the money can go next.

What a 529 to Roth IRA rollover entails

The new rollover option has a curriculum to consult. In addition to policies around 529 expenses, rolling over 529 funds into a Roth IRA carries another set of requirements of its own:

• The original 529 plan must have been open in that beneficiary’s name for 15 years or longer.
• The amount you can convert each year cannot exceed the annual Roth IRA contribution limits. In 2024, the Roth IRA contribution limit has been raised slightly, to $7,000. The beneficiary also needs earned income at least in the amount of the conversion.
• You’re only allowed to roll over $35,000 from the 529 plan into the Roth IRA, and that’s a lifetime maximum. Under the current contribution limit (which can change over time), it would take around 5 years of rollovers to hit that maximum.
• Lastly, your most recent funds aren’t fair game, in this case. Contributions to the 529 plan within the past 5 years (and what you earned on those contributions) are not eligible to roll over into a Roth IRA.

Pros and cons of a rollover

The option to roll over funds could be worthwhile if your beneficiary may not use the funds fully, though there are other paths to take to maximize the potential growth you can see from both types of accounts.

Changing the 529 plan’s beneficiary to another relative (or even yourself!) can be an option to keep the tax-free earnings growth in the family. As of July 2021, 40.1 million American adults had attended college but left without earning a degree or credential, so expenses you or your family incur when returning to higher education could qualify.²

The biggest consideration for both sides of this equation is continuity. Pulling money out of the 529 and putting it into the Roth IRA means you are changing the funds’ intentions. Now the tax-free growth is going to retirement instead of education. The 529 account could also be passed down to children as the account owners -- who can then designate their kids as beneficiaries.

The bottom line

Time is central to this money decision: Do I have time for this money to be used for education? Should I give myself more time to invest it for retirement?

Retirement could be a ways off, but that also gives you the chance to make your money work for you. On average, Americans start planning for retirement at age 30, according to Empower research. Gen Z starts earlier than other generations, at age 23. 

Taking stock of what expenses are coming next on your financial roadmap will help you navigate which path to take on this 529 and Roth IRA journey. Seeking the help of a financial advisor can also provide a guide for the regulations of what a transition would take, and there’s also the possibility more policies will be announced down the line.