Investors with remaining balances in 529 college-savings plans may roll unused balances into tax-free Roth IRAs for the benefit of named beneficiaries without risk of penalties or income-tax exposure. This provides young people with an opportunity to start saving for their future via an investment vehicle that offers tax-free growth and tax-free withdrawals in retirement.
Contributions to 529 saving plans grow tax-deferred until the named beneficiary children reach college age. At that point, withdrawals of any amount are tax-free when used to pay for qualifying education expenses, such as tuition, books, computers and room and board, at a post-secondary college, university, vocational school, and/or post-graduate program. You may also use 529 plan savings to pay up to $10,000 per year for a child’s elementary through high school education tuition at a private or religious school.
Yet, there are many circumstances when a balance remains in a beneficiary’s 529 plan after they complete their education pursuits, such as when a child receives scholarships, foregoes college altogether, or finds that their education costs are less than expected. Under the law, withdrawals for non-qualified education expenses may be subject to income tax and a 10 percent penalty. To avoid these liabilities, you have the option to change the named beneficiary to another member of that person’s family (i.e., a sister, brother, or cousin). Alternatively, you may
roll over up to $35,000 of unallocated 529 savings into a Roth IRA for the plan’s original
beneficiary. Not only does this avoid penalties and tax implications, it gives beneficiaries a head start on their retirement savings without falling under the usual income limits required for Roth IRA contributions. To qualify for a 529 plan rollover, the following criteria must be met:
The $35,000 rollover amount is an aggregate lifetime limit. This means that the amount rolled over from a 529 plan to a Roth IRA for the plan beneficiary is subject to annual IRA contribution limits, which is $7,000 in 2025.
Once a plan beneficiary gains employment, they are likely to have access to an employer’s retirement savings plan, for which they can contribute up to $23,500 in 2025 and yield tax-deferred savings while also qualifying for a potential employee match. Throughout the child’s career, they may continue to max out their 401(k) savings and eventually convert those plans into Roth IRAs, paying any related taxes at the time of conversion, to enjoy tax-free withdrawals in retirement.
About the Author: Brendan T. Hayes is a financial planner with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. He can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301 (954) 712-8888.
Brendan T. Hayes is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description or a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the preceding material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Changes in tax laws may occur at any time and could have a substantial impact on each person’s situation.
This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investors should carefully consider the investment objectives, risks, charges and expenses associated with 529 plans before investing. This and other information about 529 plans is available in the issuer’s official statement and should be read carefully before investing. Investors should consult a tax advisor about any state tax consequences of an investment in a 529 plan. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. The tax implications can vary significantly from state to state. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors.
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Posted on June 11, 2025