New rules have money rolling into 529 accounts—how to take advantage

Summary

• Starting last year, the SECURE 2.0 Act allows unused funds from 529 education savings plans to be rolled into Roth IRAs, and this is boosting the plans’ popularity with college savers.
• While concerns about over-saving have historically deterred some parents from 529 plans, the average account balance falls well below typical four-year college costs.
• Under the new rollover rules, unused 529 funds can be converted to a Roth IRA for the beneficiary—up to $7,000 annually and $35,000 lifetime—provided the account is at least 15 years old, funds have been invested for five years, and the beneficiary has earned income.

529 college savings account: benefits and growing popularity

The 529 education savings account has always been a great tool for parents and grandparents to help kids and grandkids save for college.

Most 529 college savings plans have built-in asset-allocation formulas that ratchet down investment risk as kids approach college age—a huge plus in today’s volatile markets. Contributions to 529 plans grow free of federal and state taxes. Withdrawals are also tax-free if they’re used for qualified educational expenses. The cherry on top: Many states offer generous tax breaks or income tax deductions for contributions made to in-state plans.

Unfortunately, college savings plans’ popularity has never quite matched their attractiveness. However, this is starting to change. Between Dec. 2022 and Dec. 2024, total assets in 529 plans grew from $388 to more than $500 billion, according to the Federal Reserve.¹ At TIAA, a top three provider of 529 plans, our assets grew from $38 billion to $61 billion, according to Vivian Tsai, managing director of TIAA’s education savings division.

New options for unused college savings

What’s spurring this new demand? Tsai credits attention surrounding the new 529-to-Roth IRA rollover option—a provision in the SECURE 2.0 Act of 2022 that went into effect last year. “Let’s just say The New York Times and CNBC weren’t asking us for interviews before,” says Tsai.

The Roth-to-529 rollover (details in a moment) addresses a long-standing worry surrounding college savings plans: What happens if your kids don’t spend all the money on college? According to Tsai, the odds of this happening have always been low. “It’s more of a psychological barrier than anything else,” she says. The average account balance for 529s is $30,295,² whereas the average cost of college tuition is $108,584 over four years for an in-state public college and $234,512 over four years for a private, nonprofit college.³ In other words, college savers are far more likely to under-save than over-save.

Moreover, even if little Johnny lands a full-ride scholarship—or if he decides to skip college altogether—529 plans offer other ways for funds to be utilized penalty-free. Unspent funds can be transferred to the 529 account of another child or grandchild. They can be spent on the cost of vocational schools, two-year colleges or registered apprenticeships. And up to $10,000 per year can be spent on tuition for private elementary, middle or high schools.

If all else fails, the penalties for making nonqualified withdrawals are not as onerous as many believe. Yes, nonqualified withdrawals are subject to income tax and a 10% penalty. But the taxes are no different than what you’d pay on withdrawals from a pretax IRA, and the penalties only apply to earnings, not to your original contributions.

529-to-Roth IRA conversions: rules and limits

Even so, fears about unspent college savings have prevented some savers from embracing the 529. The Roth IRA rollover option addresses this by allowing account holders to convert a 529 account with leftover money into a Roth IRA for the 529 account’s beneficiary. In other words, if Johnny has $5,000 left over in his 529 account on graduation day, mom and dad can transfer that money—tax-free and penalty-free—to Johnny’s Roth IRA, giving him a head start on retirement.

There are some restrictions on 529-to-Roth rollovers:

• The 529 account needs to have been in existence for the current beneficiary for 15 years.
• Funds being rolled over must have been in the 529 plan for a minimum of five years.
• The beneficiary of the 529 plan must be the same as the owner of the Roth IRA account.
• Rollovers are only allowed if the Roth IRA account holder has earned income for the current tax year.
• There are limits to how much money can be rolled over from a 529. For 2025, the annual rollover limit is $7,000. The lifetime maximum is $35,000.⁴

Get personalized advice on college savings

Talk to your TIAA Wealth Management advisor for guidance on a college savings strategy best suited for your situation. Don’t yet have an advisor? Schedule an appointment.