New for 2024—Parents Can Roll Unused 529 Education Funds Into a Roth IRA

Whether your kiddos are swaddled in diapers or poised to earn a high school diploma come spring, parents know the drill: The seemingly simple decision to “have a baby” comes with decades worth of responsibility — chief among them the financial variety. Adding to the sticker shock of raising kids is college tuition, something the College Board puts into perspective: According to the organization’s 2023 Trends in College Pricing, annual tuition, and fees for full-time students range anywhere from $11,260 (in-state at a public college or university) to upwards of $41,540 and in some cases double that (for private, nonprofit institutions). Enter the SECURE 2.0 Act which, as of 2024, will allow parents to roll unused 529 funds into a Roth IRA for their child without tax penalty. This change is critical for parents keen on planning (and saving) for their kids’ futures. “The biggest [financial] topics among [parents] are how to save for retirement and college,” says Melissa Lydon, founder, and CEO of EvoQue Investments in Great Barrington, Massachusetts. She works with clients to raise awareness and mitigate risk and stress when it comes to financial planning—for which there is no one-size-fits-all approach. “The reasons [for saving] vary vastly based on who you are, what your [financial] situation is, and what your goals, priorities, and values are—for your family and yourself,” she says, before distilling it down to the basics.

What is a 529 Plan?

In short, a 529 plan is a vehicle for saving for college, one that acts a lot like a Roth IRA (individual retirement account),  the most basic rule being that while there are no tax savings, the tax benefit is that it grows tax-deferred. “Ideally you put your money in, it grows in the stock market, and when you take it out—as long as you put the money towards college—you don’t get penalized or pay taxes [on the gains]” explains Lydon who connects the dots between the two savings options as they pertain to the Secure 2.0 Act. “What’s exciting about [the new rules] is that for individuals who have been saving in a 529 or have a family that’s putting money in a 529, you [now] have another option [if your child chooses not to attend college],” says Lydon, pointing to the new provision.

What Does the SECURE 2.0 Act Do?

As of January 2024, unused 529 assets—up to $35,000 in total—can be rolled into a beneficiary’s Roth IRA without incurring the customary 10% penalty for withdrawals deemed unqualified (in this case, unrelated to tuition, room and board, books, fees, and other expenses directly related to academic coursework) or generating taxable income, which is huge. “I’ve seen families with 529 plans that have gone three or four generations [without being used],” says Lydon, pointing to a changing landscape. “Envisioning the future, and whether or not a child will even attend college, is a very difficult question for parents,” she says, considering both the exorbitant cost of post-secondary school education coupled with the prevalence of financially viable options including vocational work and entrepreneurship. While the SECURE 2.0 Act might relieve those losing sleep over the possibility of excess funds getting trapped in a 529 should the intended beneficiary (i.e. your child) not need them, the new provision should not drastically change how folks think about their financial futures. “I always recommend that parents put their oxygen mask on first like you’re on an airplane [with your kids],” says Lydon who cuts straight to the chase: “If you’re saving for your children’s retirement, but you don’t have enough to retire yet, there’s something backward.” And, while Lydon encourages those who can do both simultaneously and successfully to go for it, she is also realistic: “If you have to choose [between the two], a parent needs to save for themselves and their own retirement first.”

Should Parents Change Strategy Given the SECURE 2.0 Act?

On the fence about whether or not a 529 plan is right for you and your family, given the new rules? Lydon breaks it down in very simple terms: “[A 529-to-Roth IRA rollover] is a great tool for people who have the funds to save for college easily and without stress; but it is not an end-all, be-all approach, and it doesn’t make [planning and saving for the future] more attractive for those individuals having to choose between saving for themselves and saving for their kids.” Both vehicles come with myriad pros and cons equipped with different passengers in mind (read options), all of which are governed by the same rules. Lydon suggests parents use the following questions to guide their decision-making:

• Why are you saving for your children’s future?
• Have you saved enough for your future first? 
• Does your savings strategy align with the values and needs of your family? 

“If you have enough liquidity and [financial] cushion in your life that extends to save for your child in a significant way, [the SECURE 2.0 Act] helps eradicate the uncertainty surrounding, ‘Is my kid going to go to college?’ because the money won’t get trapped; [it rolls over to a] Roth IRA, giving your child a cushion and a bump via retirement funds instead of through college…so it’s amazing,” says Lydon. That said, among the large percentage of Americans who must work and save simultaneously, the new 529-to-Roth IRA rollover is poised to increase the already widening wealth gap—a really big issue that, in Lydon’s opinion, needs to be addressed collectively. “I don’t believe that the stock market and these [specific savings] vehicles are the biggest problem,” says Lydon, pointing to “other laws and regulations [that] need to come from the top down in order to address the equity gap”—in a nod to the soaring cost of a college education in and of itself as a logical starting point. Bottom line: “[The wealth gap] was a problem before, and it will still be a problem after; [the SECURE 2.0 Act] benefits people who are on the upper side of that equity gap, giving them more freedom and flexibility, which is a good thing. While I don’t believe [this provision] makes the problem worse, we still haven’t fixed the problem.”