Saving for any purpose is a big commitment, worthy of consideration with other long-term goals and any current needs. But even if current needs allow you to make a commitment, doubt can persist, especially when it comes to saving for education in a 529 plan.

The key what-if here, for many, seems to be “what if my loved one doesn’t actually go to college?” Thanks to new federal retirement savings legislation (SECURE 2.0) passed in 2022, another answer to that question takes effect in 2024: move their 529 savings to a Roth IRA.

Congress has a tall task before it to write personal savings policy that aids Americans in navigating many complex choices. But here, it built upon other 529 features like beneficiary changes and usability for trade and apprenticeship programs with the most transformative option yet – in effect, rewarding commitment to save for education with a clear path toward saving for retirement.

While I’d love to focus solely on this new law’s potential, there are some restrictions to keep in mind:

  • Time. Your 529 account must be open for at least 15 years before you can make a 529-to-Roth rollover, so saving as early as possible is important. Also, 529 contributions from the last five years, including any associated earnings, are not eligible to be rolled over tax-free. Good things come to those who wait; in this case, you can simply delay the 529-to-Roth rollover to a later year.
  • Dollar Limits. 529-to-Roth rollover dollars are subject to annual IRA contribution limits like any regular contribution. There’s also a $35,000 lifetime limit. So in 2024, assuming all other criteria mentioned here are met, you could transfer $7,000 of unused 529 money to a Roth IRA and still have $28,000 of rollover eligibility remaining in future years.
  • Ownership. The 529 beneficiary and Roth IRA owner must be the same person, meaning you can’t use your beneficiary’s 529 to fund your own retirement savings. This requires a mindset that the money you’re putting into a 529 is truly for that person, no matter the eventual purpose.
  • Income. Already a rule for regular IRA contributions, the Roth IRA owner must have annual earned income equal to or greater than the amount of the 529-to-Roth rollover.

Additionally, treatment of 529s for state income tax purposes can vary from state to state, so it’s important to double-check whether completing a 529-to-Roth rollover will lead to a clawback of any front-end state tax incentives you previously earned for your 529 contributions.

What does this look like in practice? Assuming a 529 beneficiary graduates at age 22 with some money left in her 529, the 529 was opened before she was seven years old, and she moves on to employment with earned income, she could make multiple years’ worth of IRA contributions without straining her budget as a recent college graduate. These early contributions and their decades of potential investment growth would be among the most impactful to her long-term retirement security.