Unused 529 to Roth IRA Conversions

By Daniel Dorval, CFP®

We met with a young couple that just had their first baby and wanted to learn more about contributing to a 529 for their child. One of their main concerns is what happens to the money if they do not use the 529 for college?

That question has caused many parents to procrastinate about using 529s for college savings resulting in less opportunity to fund school for their children. Secure Act 2.0 helped alleviate that concern!

Parents now have the potential opportunity to convert unused 529 savings to a Roth IRA for their children. This is a new rule that went into effect in 2024 and there are still some ambiguities to how it works and there are some important issues to consider:

The Roth IRA is for the beneficiary…not the parent…and the conversion is considered a contribution for the benefit of the beneficiary (child).
The 529 must have been open for at least 15 years so it is important to set up 529 accounts when your children are young.
The maximum annual conversion amount is currently $7,000 for any beneficiary under the age of 50 and counts against the contribution allowance of the beneficiary. If I convert $7,000, my child cannot make a Roth IRA contribution.
The beneficiary must have earned income at least to the amount of the conversion. There are no upper income limitations like there are on a normal Roth IRA contribution.
The maximum lifetime conversion amount is limited to $35,000 per beneficiary.
It must be a direct conversion from the 529 plan to the Roth IRA. In my personal experience this is easier to do if the 529 and the Roth IRA are at the same custodian (Vanguard, American Funds, Fidelity, etc.).
Conversions have to be made from contributions and earnings that are at least five years old (this may be challenging to determine!).

There are still a lot of questions for the IRS to clarify and my best guess is the IRS will not have a lot of urgency to clarify certain issues. However, this new rule worked well for me personally. Our oldest graduated from UW – Madison with some leftover 529 funds. We successfully processed a $7,000 conversion to a new Roth IRA in their name. In our case the conversion was at American Funds and was straightforward. My understanding is some other 529 conversions are poorly prepared to process conversions and might even say it is not possible yet.

It is also possible some states may not consider a conversion in the same way as the federal government. As of now Minnesota is not considering conversions as a tax free use of 529 funds and may subject our conversion to state income taxes on the gains. I do not know how they will enforce this different tax treatment?

While there will not be many people that can benefit from this new provision, the fear of parents in over-funding a 529 account is reduced. That should help more parents save for college which is a generally good thing.

Our Roth conversion for our oldest is a powerful way to get them started on saving for the future! A single $7,000 conversion is projected to be worth over $150,000 in 40 years assuming an 8% annual growth rate…and all of that money is potentially tax-free as a Roth IRA. Multiply that amount by five if we make the full $35,000 of Roth conversions. That is an amazing start to retirement savings for a generation that may be challenged to save on their own!

This material is intended for educational purposes only. You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. Nothing in this material constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Dorval & Chorne Financial Advisors is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.