Key Takeaways
- SECURE 2.0 allows up to $35,000 lifetime rollover from 529 to beneficiary's Roth IRA if account open 15+ years
- 529-to-Roth rollovers follow annual Roth contribution limits ($7,000 in 2025) and require beneficiary earned income
- K-12 tuition withdrawals limited to $10,000/year per student (increasing to $20,000 in 2026 under OBBBA)
- State tax deductions vary widely; some states offer deductions only for contributions to their own state plan
- Non-qualified withdrawals incur income tax plus 10% penalty on earnings; exceptions include death, disability, and scholarships
529 Plans In-Depth
529 plans have become the cornerstone of education savings strategies, offering unmatched tax benefits and flexibility. Recent legislation, particularly SECURE 2.0, has made these accounts even more valuable by addressing the long-standing concern about unused funds.
529 Plan Structure and Benefits
Tax Advantages
Federal Tax Benefits:
- Contributions grow tax-deferred
- Qualified withdrawals are completely tax-free
- No federal tax deduction for contributions (but contributions reduce estate)
State Tax Benefits:
- Over 30 states offer income tax deductions or credits for contributions
- Some states limit benefits to their own state's plan
- A few states offer unlimited deductions
- Some states offer deductions for contributing to ANY state's 529
State Tax Deduction Comparison (2025)
| State Approach | Examples | Details |
|---|---|---|
| Deduction for own state plan only | New York, Virginia, Colorado | Must use state plan to get deduction |
| Deduction for any 529 plan | Arizona, Kansas, Missouri, Montana | Flexibility to choose best plan |
| Tax credit | Indiana, Vermont | Credit (not deduction) for contributions |
| Unlimited deduction | Colorado, New Mexico | No cap on deduction amount |
| No state income tax | Florida, Texas, Washington | No deduction available (no income tax) |
| No deduction offered | California, Delaware | Have income tax but no 529 deduction |
Qualified Education Expenses
Higher Education (Post-Secondary)
| Expense Category | Qualified? | Notes |
|---|---|---|
| Tuition and fees | Yes | Any accredited institution |
| Books and supplies | Yes | Required for enrollment |
| Room and board | Yes | If enrolled at least half-time; limited to COA or actual cost |
| Computers and equipment | Yes | Including internet access |
| Student loan repayment | Yes | $10,000 lifetime limit per beneficiary |
| Apprenticeship programs | Yes | Registered apprenticeships |
K-12 Education Changes
| Change | Current (2025) | New (2026) |
|---|---|---|
| Annual tuition limit | $10,000 | $20,000 |
| Homeschool curriculum | Not qualified | Qualified |
| Test fees | Not qualified | Qualified |
| Tutoring | Not qualified | Qualified |
SECURE 2.0: 529-to-Roth IRA Rollover
One of the most significant changes to 529 plans came with SECURE 2.0, effective January 1, 2024. Unused 529 funds can now be rolled over to the beneficiary's Roth IRA.
Rollover Requirements
| Requirement | Details |
|---|---|
| Account age | 529 must have been open for at least 15 years |
| Lifetime limit | $35,000 per beneficiary (lifetime) |
| Annual limit | Subject to annual Roth IRA contribution limit ($7,000 in 2025-2026); catch-up contributions likely NOT eligible* |
| Earned income | Beneficiary must have earned income >= rollover amount |
| Recent contributions | Contributions and earnings from last 5 years cannot be rolled over |
| Same beneficiary | 529 beneficiary and Roth IRA owner must be the same person |
| Income limits | NOT subject to Roth IRA income limits |
Key Planning Considerations
15-Year Clock: The account must be open 15+ years from the original open date. Changing beneficiaries may restart the clock (IRS guidance pending). Plan ahead - open 529s early even with minimal contributions.
Coordination with Regular Roth Contributions: The rollover counts toward the annual Roth limit. Cannot contribute $7,000 AND roll over $7,000 in the same year.
*Note on Catch-Up Contributions: The $8,000 catch-up limit for those 50+ likely does NOT apply to 529-to-Roth rollovers. The statute references "annual contribution limit" not "catch-up limit." IRS guidance is pending, but most practitioners assume the $7,000 base limit applies.
Income Limits Bypass: Unlike regular Roth contributions, 529 rollovers are NOT subject to income limits. High earners can use this as a backdoor Roth strategy.
529 Plan Ownership and Control
The account owner (not the beneficiary) maintains full control:
- Change beneficiary at any time (to family member)
- Change investment allocations (twice per year)
- Withdraw funds (subject to tax/penalty if non-qualified)
- Name successor owner
- Determine timing and amounts of distributions
Beneficiary Change Rules
Funds can be transferred to a new beneficiary tax-free if the new beneficiary is a family member of the original: Spouse, child, grandchild, parent, grandparent, sibling, stepparent, niece, nephew, aunt, uncle, first cousin, or in-laws.
Non-Qualified Withdrawals
Tax and Penalty Treatment
When funds are used for non-qualified expenses:
- Earnings portion is taxed as ordinary income
- 10% penalty applies to earnings
- Principal (contributions) is returned tax-free and penalty-free
Penalty Exceptions
The 10% penalty is waived (but earnings are still taxable) for:
- Beneficiary receives tax-free scholarship
- Beneficiary dies or becomes disabled
- Attendance at U.S. military academy
529 Plan Gift and Estate Tax Treatment
Gift Tax Benefits
- Contributions qualify for annual gift tax exclusion ($19,000 per donor in 2025-2026)
- Married couples can gift split for $38,000 per beneficiary
- Superfunding: Up to 5 years of gifts in one year ($95,000 single; $190,000 married)
Estate Tax Benefits
- 529 contributions are removed from the donor's estate
- Superfunded amounts: If donor dies during 5-year period, prorated amount returns to estate
- Account owner can retain control without estate inclusion
CFP Exam Tip: The combination of gift tax exclusion, estate removal, and retained control makes 529s a powerful estate planning tool, especially for grandparents.
Under SECURE 2.0, what is the LIFETIME limit for rolling over 529 plan funds to a beneficiary's Roth IRA?
A client receives a $15,000 scholarship. They have $15,000 in their 529 plan. What is the tax treatment if they withdraw the entire $15,000?
To roll over 529 funds to a Roth IRA under SECURE 2.0, which of the following is NOT a requirement?