What to Do With Unused 529 Plan Assets

One of the biggest concerns families have when funding a 529 college savings plan is simple: What if we save too much?

The good news is that unused 529 assets are no longer the problem they once were. Thanks to changes made under SECURE 2.0, families now have significantly more flexibility when a child receives scholarships, attends a less expensive school, earns employer tuition assistance, or decides not to pursue a traditional college path. One of the most attractive new options is the ability to roll unused 529 assets into a Roth IRA for the beneficiary.

For many families, this can transform unused education savings into a powerful head start on retirement.

Option #1: Roll Unused 529 Funds into a Roth IRA

Beginning in 2024, beneficiaries can transfer certain unused 529 plan assets directly into their own Roth IRA without triggering federal income taxes or penalties, subject to several important rules. This provision was created under the SECURE 2.0 Act and is widely viewed as one of the most taxpayer-friendly changes to college savings plans in years.

Key Rules to Know

To qualify:

• The 529 account must have been open for at least 15 years.
• The Roth IRA must belong to the 529 beneficiary.
• Annual transfers are limited by the annual Roth IRA contribution limit.
• The beneficiary generally must have earned income equal to the amount being rolled over for that year.
• Contributions made within the previous five years (and associated earnings) are not eligible for rollover.
• Lifetime rollovers are capped at $35,000 per beneficiary.

Why This Is Such a Powerful Planning Opportunity

Imagine a 22-year-old graduate with $35,000 remaining in a 529 plan. Rather than withdrawing the funds and paying taxes and penalties on earnings, those assets can potentially be shifted gradually into a Roth IRA.

Because Roth IRAs offer tax-free growth and tax-free qualified withdrawals in retirement, funding a Roth early in adulthood can have tremendous long-term value. Even relatively small contributions made in someone's 20s can potentially compound for decades.

For parents and grandparents, this means excess college savings can help launch a young adult's retirement journey rather than becoming a tax headache.

Option #2: Change the Beneficiary

If one child doesn't need all of the funds, another family member may.

529 plans generally allow account owners to change beneficiaries to other qualifying family members, including:

• Siblings
• Step-siblings
• Grandchildren
• First cousins
• Certain other relatives

This can be an effective strategy when multiple family members may have future education expenses. Instead of withdrawing funds, the account can continue growing tax-advantaged for the next beneficiary's education needs.

Option #3: Save It for Future Education

Many people think of 529 plans only for undergraduate degrees, but qualified education expenses can include much more.

Unused assets may potentially be used in the future for:

• Graduate school
• Professional degrees
• Trade schools
• Certain vocational programs
• Continuing education opportunities

For a beneficiary contemplating law school, medical school, or an MBA, preserving 529 assets may make excellent sense.

Option #4: Use Funds for Future Generations

Another overlooked strategy is keeping the account intact for future family members.

A beneficiary may eventually have children of their own. In some situations, families choose to preserve excess 529 assets and later change the beneficiary to a grandchild, allowing education savings to continue across generations.

This can be a particularly attractive option for families focused on long-term legacy planning.

Option #5: Withdraw the Funds

If none of the above options fit, funds can still be withdrawn.

However, non-qualified withdrawals generally result in ordinary income taxes and a 10% federal penalty on the earnings portion of the withdrawal. Contributions are not taxed because they were made with after-tax dollars.

While this is usually the least attractive option, it is important to remember that taxes and penalties apply only to earnings—not the original contributions.

The Bottom Line

The fear of "overfunding" a 529 plan has diminished significantly.

Today, families with unused 529 assets have more flexibility than ever before. The new Roth IRA rollover rules are particularly compelling because they allow education savings to become retirement savings, helping beneficiaries build long-term financial security while preserving many of the tax advantages that made 529 plans attractive in the first place.

Every family's situation is different, and the best strategy depends on age, education plans, tax considerations, and long-term goals. Before making a decision, it is wise to consult with your financial advisor and tax professional to evaluate which option creates the greatest value for your family.

JT Stratford Wealth Management

Have questions about your 529 plan, college funding strategy, or Roth IRA planning opportunities? Contact JT Stratford to discuss how recent rule changes may fit into your family's overall financial plan.

Disclosure:

JT Stratford, LLC is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. This material is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice or a recommendation to buy or sell any security or adopt any particular investment strategy. All investments involve risk, including the possible loss of principal. Tax laws and regulations are subject to change, and their application depends on individual circumstances. Consult your financial, tax, and legal advisors before making any financial decisions.