529-to-Roth Rollovers Unlock $35,000 Retirement Boost for Unused College Funds

Families holding unused 529 college savings can now transfer up to $35,000 into a beneficiary's Roth IRA tax-free under SECURE 2.0, removing the penalty risk that once punished overfunded education accounts.

"The trend is toward more flexibility, not less," said Jonathan Codispoti, president at Legacy Wealth Strategies. "If enrollment declines persist, I'd expect further expansion rather than restrictions."

The rollover requires the 529 account to have been open at least 15 years, transfers must come from contributions made at least five years earlier, and the annual amount is capped at the beneficiary's Roth IRA contribution limit — $7,500 for 2026. That means a full $35,000 transfer would take roughly five years, and the beneficiary must have earned income matching the rollover amount.

For a family that overfunded by $100,000, the leftover beyond the $35,000 rollover cap still faces a 10 percent federal penalty plus income tax on earnings if withdrawn for nonqualified expenses. With private tuition nearing $100,000 a year and public four-year costs projected at $150,000 to $250,000 in future dollars, the stakes for choosing the right savings vehicle are rising.

The mechanics of the rollover

Under SECURE 2.0, passed by Congress at the end of 2022, the 529-to-Roth transfer must go to a Roth IRA opened by the 529 beneficiary, and the account must have been maintained for that beneficiary for at least 15 years. Transfers must come from contributions made at least five years before the transfer date, and the annual amount cannot exceed the beneficiary's Roth IRA contribution limit, according to Fidelity.

The IRS has not yet issued final guidance on the provision, though it provided some information in the 2025 IRS Publication 590-A. "It is anticipated the IRS may provide additional guidance on 529-to-Roth IRA transfers, which could result in changes or modifications to some requirements," Fidelity noted. Contribution limits and tax rules change annually, so families should verify current figures against the latest official announcements.

Prioritizing retirement before college

Both experts stress that retirement savings should come before college savings. "You can borrow for college. You can't borrow for retirement," Codispoti said. Michael Van Boening, a certified financial planner and director of financial planning at Mercer Advisors, recommends clients aim to save 75 percent to 80 percent of projected college costs in a 529, with the remainder covered by scholarships, grants, or cash flow.

For families that can afford to front-load, the five-year gift tax averaging rule allows contributions of up to $95,000 per child in a single year, or $190,000 combined for spouses who split gifts. Individual contributions up to $19,000 per year, and $38,000 per married couple, are exempt from the federal gift tax.

Grandparents get an added benefit: under FAFSA rules implemented in 2024, distributions from a grandparent-owned 529 no longer count as student income, so they won't hurt a grandchild's financial aid eligibility in most cases.

Does a four-year degree still pay off?

Van Boening points to National Center for Education Statistics data showing college graduates earn about 59 percent more than those with only a high school diploma. But he cautions that some degree programs offer poor returns on the education investment, especially in fields with weak demand. "It pays to choose wisely," he said.

Codispoti agrees a four-year degree still makes sense, but "the ROI calculus has changed." The real question, he said, isn't whether college pays off but whether a child will graduate with a plan. Targeted vocational paths, apprenticeships, and entrepreneurship are viable alternatives worth serious discussion.

For parents seeking maximum flexibility, Codispoti suggests prioritizing a Roth IRA first, since contributions can be withdrawn penalty-free for any reason, including college, before using a 529 for additional savings.

This article is for informational purposes only and does not constitute investment, tax, or legal advice.