‘This is like Roth IRA-maxxing' — why everyone’s suddenly raving about 529 plans even when college isn’t on the table

The SECURE 2.0 Act, passed by Congress at the end of 2022, made this process easier by overhauling key components of the U.S. retirement landscape and providing more flexibility in how 529 owners deploy funds. In particular, a key provision that launched on January 1, 2024, lets program beneficiaries transfer, tax- and penalty-free, up to a lifetime limit of $35,000 from a 529 to a Roth IRA.

“This is like Roth IRA-maxxing,” said Robert Jeter, a financial advisor at Back Bay Financial Planning & Investments told Bloomberg. “If somebody brought this to me, I’d be like, ‘Man, you’re really after every last dollar.’”

Consider Madison, an 18-year-old college 529 plan recipient who’s accumulated $30,000 in program savings after her parents opened up the plan when she was three years old. Instead of attending college, Madison intends to become a police officer and won’t use the 529 plan money for tuition and room-and-board. Under government mandates, if Madison’s 529 fund assets aren’t used for qualified college expense purposes, the fund’s $30,000 may be subject to federal taxes, which could amount to $3,000-plus.

Under the new 529 plan rules, Madison’s parents can, over four years, put $7,500 annually into a Roth IRA until the full $30,000 is transferred. After year four, Madison has an extra $30,000 earmarked for retirement, which, if she retires around age 67 and invests the cash wisely, could add about $500,000 to her retirement coffers.

A sizable caveat is attached to the new 529 plan/IRA rule: the 529 account must be open and active for 15 years. Additionally, any contributions to a 529 plan aren’t tax-deductible, although many U.S. states do offer a tax break on 529 plan contributions.

Retirement planning gets a reset with the 529 rule

Retirement planning specialists say the ability to roll unused 529 dollars into a Roth IRA fundamentally changes how families approach these accounts.

“Prior to the Secure Act 2.0, I observed many clients were reluctant to overfund their 529 plans — even if education was of high value to their family,” Nathan Donohue, CEO at Scottsdale, Arizona-based Valence Wealth, told Moneywise. “The fact that the funds could only be used for college or otherwise could face taxes and penalties made many parents feel a certain amount of risk.”

Now that anyone can roll over up to $35,000 from a 529 to a Roth IRA, this gives parents the opportunity to help save for college — and give their child a jumpstart on tax-free retirement savings.

“The biggest hurdle to clear is the 15-year account age requirement,” Donohue said. “This is why we recommend clients open the account as soon as possible, so that they can hit that requirement ideally before the child graduates college.”

Superfunding a college 529 plan brings more value to the table for contributors

College 529 contributors are also using the plans to reduce their own tax liability through so-called “superfunding” large 529 plan contributions.

Basically, superfunding allows 529 plan holders to bank up to five years’ worth of total plan contributions in one year while still staying within federal tax gift limits. The current federal annual gift tax exclusion allows anyone to gift $19,000 to a recipient, or $38,000 for married couples. Any higher sum given in a single year remains non-tax-deductible. With college 529 plan superfunding, the contributor can gift up to five years of annual exclusions in one 529 account contribution for a single beneficiary, capped at $95,000 for single plan givers and $190,000 for married couples.

That move not only provides a powerhouse asset boost for the college 529 plan, performance-wise; it also offers ample tax and estate-planning benefits for contributors.

Let’s say Madison’s grandparents funded 529 plans for her and four of her cousins. By superfunding each of the five plans in a single year, her grandparents would gain a $190,000 taxable estate deduction.

“Superfunding a 529 account may be a strategy to consider for parents or grandparents with sufficient assets who have already considered their own retirement needs, liquidity and other financial goals,” Christina Mehltretter, CPA and chief operating officer at Carolinas Financial and Retirement Planning, told Moneywise. “That’s key when determining if gifting towards a 529 is part of a larger financial plan.”