Introducing the 529-to-Roth

College savings plans are now more attractive, thanks to new law
allowing unspent funds to be rolled over into Roth IRAs

  • “What happens if my child doesn’t go to college?” It’s a common concern about 529 college savings plans.
  • A new law addresses this by allowing unspent money to be rolled over into Roth IRAs.

Despite their many advantages, college savings plans have always suffered from a what-if problem. A new law is offering a solution.

The what-if stems from the federal 10% penalty tax on earnings that savers face if money invested in a 529 college savings plan is not spent on education. It’s a minor drawback to an otherwise fantastic program for parents or grandparents saving for a child’s education. Contributions to 529 plans grow tax-deferred, and withdrawals are tax-exempt so long as they are used for qualified education expenses. Those qualified expenses may include not only tuition, room and board at any accredited university, college or vocational school, but also books, laptops and some computer software. Plus, some states offer tax breaks for contributions made to in-state 529 plans. (Check with your wealth advisor or tax professional to see if your state is one of them.)

“529 plans are a great tool to earmark funds for your child’s future education,” said Vivian Tsai, senior director and head of relationship management for TIAA’s education savings unit.

Now back to those penalties. It’s actually rare to have leftover money in a 529 account. Nationwide, the average account size for 529 plans is only $25,630, whereas average tuition costs are $218,084 over four years for students attending private colleges and $102,828 over four years for in-state students attending public colleges.1 In other words, college savers are more likely to under-save than over-save.

That said, over-saving does occasionally occur. And under the law, any withdrawals from 529 plans that are not used for qualified education expenses may be subject to income tax and a federal 10% penalty tax on earnings (and potential recapture of federal and state income tax deductions). What many college savers don’t realize, according to Tsai, is that the penalty applies only to investment gains, not your principal. Nevertheless, the mere threat of a penalty discourages some from ever opening an account. “It’s more of a psychological barrier than anything else,” Tsai said. “The reaction is, ‘Oh my god, I’m going to be paying a 10% penalty.’ Or it’s, ‘I don’t want to tie funds up in an education account for my kid when he’s going to be a genius or an athlete and get a full ride.’”

Congress solved this problem with the passage of SECURE 2.0 Act of 2022. The new law contains provisions that, starting in 2024, allows 529 account holders to roll over up to $35,000 from a 529 plan into a Roth IRA without a 10% penalty or without owing taxes that they may otherwise owe.

“529 plans are a great tool to earmark funds for your child’s future education,” said Vivian Tsai, senior director and head of relationship management for TIAA’s education savings unit.

Earning Benefits of the 529-to-Roth Rollover

The Earnings Benefits of 529-to-Roth Rollover illustration is intended to show a hypothetical example of the principle of compounding. The example does not include the impact of any investment fees, expenses or taxes that would be associated with an actual investment. If such costs had been taken into account, the results shown would have been different. It also does not factor in market volatility.

There are some restrictions. Rollovers are limited to the maximum annual contribution amount, currently $7,000 per year; the Roth IRA must be in the same name as the 529 account’s beneficiary; the 529 account must have been in existence for at least 15 years; and 529 contributions made within the last five years are ineligible to be rolled over.2 Even with restrictions, Tsai thinks the rollover option will increase the usage of 529s.

If you are considering a 529-to-Roth rollover, please consult with your wealth advisor or tax professional about your individual situation and possible state rules and regulations.

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1 "529 Savings Plans 2022 End-of-Year Data,” College Savings Plans Network, December 31, 2022. 2023/03/CSPN-EOY-22-Data.pdf; Melanie Hanson, “Average Cost of College & Tuition,” Education Data Initiative, June 25, 2023.

2 Jeff White, “Section 126: Rolling Over 529 Plan Funds Into a Roth IRA,” Saving For College, December 24, 2022. over-529-plan-funds-to-a-roth-ira. This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

TIAA-CREF Tuition Financing, Inc. (TFI) is the Plan Manager for several state 529 plans, and TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, is the distributor and underwriter for those plans.