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The 529-to-Roth Rollover For The Win

So, 2024 is just around the corner, and with it comes this big financial update – the SECURE 2.0 Act. Buried in this act is a gem that could really help with saving for education. It's called the 529-to-Roth IRA rollover. This could be a real game-changer for those of us looking to save for our kids' education without passing on the burden of huge student loans. Especially considering that a lot of us still feel the weight of our own student loans, this could be a game-changer. It's all about giving us a new way to save for our kids' education, so hopefully, they won't have to grind through the same debt we did.

Understanding the 529-to-Roth Rollover

This provision, effective from 2024, permits a rollover from a 529 plan to the beneficiary's Roth IRA, subject to certain conditions:

  • The 529 plan must have been open for at least 15 years.

  • A lifetime rollover limit of $35,000 per beneficiary.

  • Contributions made within the last five years are ineligible for the rollover.

  • The rollover amount is capped annually by the IRA contribution limit.

Why Not Use a 529? Addressing Hesitations and Expanding Flexibility

Historically, many parents and guardians have been hesitant to invest heavily in 529 plans due to their restrictive nature, which mandated that funds be used solely for educational purposes. This created a dilemma for those worried about overfunding these accounts and potentially paying a penalty if their child didn't require the full amount for education. However, recent changes have significantly expanded the utility and appeal of 529 plans.

Now, not only can these funds be used for K-12 education expenses and to pay some toward student loans, but the introduction of the 529-to-Roth rollover option adds a new dimension of flexibility. This enhancement transforms 529 plans from a narrowly focused education savings tool into a versatile instrument for broader financial planning, aligning more closely with the diverse needs and goals of modern families.

Potential Challenges and Considerations

While the 529-to-Roth Rollover offers exciting possibilities, it's not without its challenges. Families need to be mindful of the 15-year account age requirement, which requires long-term planning and commitment. Additionally, the $35,000 lifetime rollover limit per beneficiary and the exclusion of contributions made in the last five years from the rollover eligibility require careful financial tracking and planning. These rules necessitate a detailed understanding of one's financial timeline and goals to ensure that the benefits of the rollover are fully realized without inadvertently violating the stipulations.

Strategic Planning with 529 Plans

For some, 529 plans have long been a popular choice for education savings, offering tax-free growth and other benefits. It's important to strategize the timing and amount of rollovers, keeping in mind the annual IRA contribution limits. This careful planning can maximize the benefits of the rollover while staying within regulatory boundaries, turning a once rigid educational fund into a dynamic tool for long-term financial health.

Tax Planning and Long-Term Considerations

The introduction of the 529-to-Roth rollover necessitates a fresh approach to tax planning and long-term financial strategy. This change is particularly beneficial for young families or those just starting to consider their savings options. While contributions to 529 plans are not federally tax-deductible, the earnings grow tax-free, and withdrawals for qualified education expenses are also tax-free. The new rollover option allows families to strategize for long-term tax-efficient growth, extending the utility of these plans beyond immediate education needs.

For those who anticipate having excess funds in their 529 plans, this presents a tax-advantaged opportunity to contribute to their child's retirement savings early on. This strategic foresight, coupled with the 15-year account opening requirement and the potential of superfunding a 529 plan, can significantly enhance a family's financial portfolio, effectively bridging the gap between educational savings and retirement planning.

The Bottom Line: Embrace the 529-to-Roth Rollover Strategy

So, the 529-to-Roth rollover is here, and it's a pretty big deal for anyone trying to save for education and think about the future. It's like having a new tool in your financial toolkit – one that lets you shift gears from saving for school to stashing away for retirement. It's great for parents who want to make sure every dollar counts, without getting tangled in too many rules.

But here's the thing: while it's a cool option, it's not a one-size-fits-all. It's smart to chat with someone who knows their stuff to figure out how this fits into your family's plan. They can help you make sense of it all and plan it out so you're getting the most bang for your buck. In short, this rollover could really help set up your kids for a better start, without leaving you guessing.


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

This content not reviewed by FINRA

Alchemist Wealth, LLC is registered as an Investment Adviser with the State of Ohio and only provides advisory services in states where registered or otherwise exempt from registration. All information provided herein is for educational and informational purposes only and should not be viewed as investment advice. Any links to third party information or data are believed to contain accurate information at the time of publishing.

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