New Law; 529 Plans & Roth IRAs


One of the biggest reasons parents hold back on funding their child’s 529 College Savings Plans is the fear of overfunding it. They are afraid that they will be locking up money that can only be used for education. What if their child doesn’t go to college? The horror if their child gets a scholarship and they have too much money in their 529 Plan??

The Secure Act 2.0 & 529 Plans

A new federal law, The Secure Act 2.0 section 126 helps resolve this some. This section changes the IRS rules around 529 Plan distributions. Starting in 2024 $35,000 can be rolled over to the beneficiary’s Roth IRA after its been opened for 15 years!! What an excellent opportunity to save money for your child. Now it can grow tax free and be used tax free for education or later in life!


Money from a Roth IRA can be used tax free for any expense in retirement. Before retirement, Roths can be used towards the purchase of a first home tax and penalty free, up to $10,000.

Penalty free withdrawals from a Roth IRA are allowed before retirement age for the following reasons according to Investopedia:

1) For unreimbursed medical expenses exceeding 10% of adjusted gross income (AGI)

2) Paying medical insurance premiums after losing a job

3) You owe the IRS and the distribution is due to an IRS levy

4) You’re taking qualified reservist distributions

5) The money is for qualified disaster recovery expenses

6) For higher education expenses

7) For the cost of childbirth or adoption expenses, up to $5,000

Why is this change for 529 Plans significant?

I am a champion of the 529 Plan and have helped families open accounts for their children. Parents hesitate to open and fund 529 Plans because they are worried the money will become “trapped.” Before the Secure Act 2.0, 529 Plans could only be used for k-12 and college expenses tax and penalty free. Otherwise, there are penalties and ordinary income taxes that are levied.

First, the money in a 529 Plan won’t be “trapped.” All contributions into a 529 Plan can be withdrawn tax free. Second, if your child receives scholarships for higher education, the amount of the scholarship money can be withdrawn penalty free. You will have to pay ordinary income tax on the profits. Third, you can now roll over a lifetime maximum amount of $35,000 tax and penalty free into a Roth IRA.


Leftover funds in a 529 Plan can be withdrawn. They aren’t “trapped.” The profit on unqualified 529 Plan withdrawals carry a 10% penalty, applicable state penalties and ordinary income taxes. It seems like a steep price to pay. However, when I did the math, it wasn’t that bad. You’re still going to walk away with the profit that was earned on the contributions.

Here’s an example of what I’m talking about:

If you contribute $1,000 a year and realize a 7% gain each year for 18 years, your child’s 529 Plan will have about $36,000 in the account. That’s $18k in contributions and $18k in profits. If you withdraw the full $36,000 for non-educational purposes you’ll pay about $5,100 in federal income tax (assuming a 28% rate) and about $1,800 in penalties. Depending on your state, you may have to pay some recapture fees for the state tax benefit you received and/or pay state income tax on various portions of unqualified withdrawals. For example, California imposes a 2.5% fee on the gains portion of your withdrawal.

If we lived in California, made unqualified withdrawals of $36k, you’d still walk away with around $10,550 in gains or about $28,550 overall (California would penalize you 2.5% of your profit or $450). Yes, it it is painful not to get the full $36k, but you’re still walking away ahead.

Paying the penalties, taxes and recapture is painful. However, being unprepared to pay for college would be painful and could take a long time to recover from.

The Carrot

This change in the plan is meant to encourage families in America to save for college using 529 Plans. Higher education is cripplingly expensive for many parents and students. I’d rather have saved too much and pay tax and penalties than go into debt to afford college. Now there’s an opportunity to skirt some of those penalties and taxes by rolling over funds to a Roth IRA. This article will help you get started and open a BrightStart College Savings Plan. Its the same plan I opened for Baby Moneyaire and help other families open for their children. Consider this plan if your state’s plan isn’t very good or there are no state benefits.

When can 529 Plans be rolled over?

This change won’t go into effect until 2024, so you can’t transfer funds over, yet. There’s also some vagueness regarding when the clock starts and stops for the 15 year period. From everything I’ve read so far, the clock seems to begin when a beneficiary is named. As we get closer to this change coming into effect, more clarifying rules and regulations will be released. Be sure to subscribe to this blog. I’ll post updates as I see them.

Here is some more information regarding timing:

After a 529 Plan has been open for a beneficiary for 15 years, $35,000 can be rolled over into the beneficiary’s Roth IRA. Be aware of the extra layer of seasoning of the funds that needs to happen. Funds have to have been in the account for five years before they can be rolled over. So:

  1. First the 529 Plan has to be open for 15 years in the name of the beneficiary
  2. The funds need to have been in the account for at least five years before they can be rolled over
  3. Transfers can begin in 2024 so long as funds have been in the account for at least 5 years.

Who; Beneficiaries vs. Owners

An important distinction; money from a 529 Plan can only be rolled over to the beneficiaries Roth IRA. Account owners cannot roll over 529 Plan money into their own Roth IRA unless they are also the named beneficiary.

Its not clear, yet, how many $35,000 roll overs can be performed when the beneficiary of the account is changed. As more clarity is provided, I’ll provide updates.


So, we know there’s a lifetime maximum of $35,000 that can be rolled over. However, Roth IRA contribution limits still apply. If this rule went into effect today, a maximum of $6,500 ($7,500 for those 50+) can be rolled over per tax year. Once the max contribution is made for a Roth IRA, regardless of where the money came from,further contributions aren’t allowed.

Although contribution limits apply, income limits don’t. If you make too much to contribute to a Roth IRA, you will be able to contribute to a Roth via a 529 transfer. This might be a nice way to get around the income limits rule, especially if you aren’t able to perform a backdoor Roth contribution. Keep in mind the beneficiary must have had earned income of at least the amount being rolled over. For example, if you roll over $3,000, the beneficiary must have earned $3,000 in that tax year.


So far, I don’t see any way to perform a rollover from our 529 Plan to a Roth IRA on the Bright Start platform. I’m sure that eventually there’ll be an option to do so, or at least forms created for this type of transaction from the IRS. As they become available, I’ll provide updates.

529 Plans just got better! Take advantage!

Good luck to you and your families as you plug away saving for college. I hope this new opportunity encourages those hesitant to take the plunge to open and fund 529 Plans.


Mrs. Moneyaire

3 responses to “New Law; 529 Plans & Roth IRAs”

  1. […] 529 plan money can be used at universities, colleges, trade schools and apprenticeship programs for tuition and room and board. It can buy school materials like books and laptops too. Also, with the passage of the Secure Act 2.0, $35,000 can be rolled over into a Roth IRA. […]

  2. […] It’s hard to predict the future, especially the future decisions your child may make. Even if your child doesn’t go to college they may still want to go on to another higher educational institution. Money is a 529 Plan can also pay for technical/trade school or apprenticeship programs. If your child does not want to take the higher education route, you can now rollover up to $35,000 into a Roth IRA. […]