A 529 Plan Is No Longer Just About Paying for College

When most people think about a 529 plan, they think of one thing: college savings.

You put money away, it grows tax-free, and someday it helps pay for education expenses. While that’s still true, a recent rule change has made 529 plans much more flexible.

In fact, for some families, a 529 plan can now help fund not only a child’s education, but potentially their retirement as well.

What Happens If the Money Isn’t Needed?

When I talk to parents about 529 plans, one of the biggest concerns that comes up is: What happens if we don’t need the money in the plan?

There are several reasons why that might happen.

Maybe the child receives a scholarship. Maybe they don’t need all the money. Maybe they don’t even go to college.

Because of all these “what-ifs” and “maybes,” using a 529 plan could feel like a difficult decision. That’s because non-qualified withdrawals—withdrawals used for something other than education—could trigger taxes and penalties on the earnings.

But beginning in 2024, a new option became available.

Unused 529 assets can now be rolled into a Roth IRA for the beneficiary, subject to certain rules. That changes the conversation significantly.

Understanding the Key Rules

Before everyone runs out and opens a 529 plan, there are a few important rules to understand.

First, the 529 account must have been open for at least 15 years.

Second, there is a lifetime rollover limit of $35,000 per beneficiary.

Third, the beneficiary must have earned income in the year the rollover occurs. The Roth contribution limit still applies, so chances are it will take several years to roll the full $35,000 into the Roth IRA, if and when the time comes.

There are also restrictions on more recent contributions, so this is definitely something that requires planning.

But the opportunity is real.

A Potential Head Start on Retirement

Imagine your child graduates from college and there is still money left in their 529 plan.

Instead of worrying about penalties or taxes, some of those dollars could potentially be moved into a Roth IRA. Once the money is inside a Roth IRA, future growth can be tax-free.

Think about the impact of that.

Someone in their early 20s could begin saving for retirement with a meaningful Roth IRA balance before they have even started accumulating wealth on their own. Thanks to the power of compounding, that head start can be incredibly valuable.

For many families, this changes how they think about 529 plans entirely.

It’s no longer just a college account. It’s potentially a college-and-retirement account.

Education comes first. But if money is left over, it can help jump-start retirement savings.

An Opportunity for Multigenerational Planning

For grandparents and high-net-worth families, this creates another interesting planning opportunity.

529 plans already offer a tax-efficient way to help fund education while moving assets out of an estate. Now, with Roth rollover flexibility, excess education savings can continue benefiting the next generation long after graduation.

Because beneficiaries can often be changed among family members, 529 plans remain one of the more flexible tools available for multigenerational planning.

Your Retirement Still Comes First

That doesn’t mean you should intentionally ignore your own retirement planning.

In fact, I always remind clients: Your retirement comes first.

529 plans are a complement to your overall financial plan, not a replacement for funding your own future.

But if you are already planning to help your children or grandchildren with education expenses, it is worth understanding that these accounts have become far more flexible than they used to be.

When you step back and look at it, one of the biggest planning opportunities is simple: A 529 plan is no longer just about paying for college. It may also become a way to give the next generation a head start on retirement.

That’s a pretty powerful combination.

If you would like help determining whether a 529 strategy fits your family, estate, or education planning goals, we’re always happy to help.

You can schedule a time by visiting caserta-dejongh.com or by giving us a call.