From college savings to retirement savings: How a 529 plan can give the next generation a head start

Saving for a child’s education is one of the most important financial goals many families take on. But what happens if there’s money left over in the 529 plan?

A child may receive scholarships, attend a less expensive school, or choose a different path altogether. When 529 funds are left over, families may have an opportunity to turn those unused education savings into an early start on retirement savings for the beneficiary.

This may be possible thanks to changes to 529 education savings plans. If a student finishes school with unused 529 funds, rules allow a portion of those savings to be rolled into a Roth IRA in their name, potentially giving them decades of tax-free investment growth.

For families who have carefully saved for education, this creates a valuable new planning opportunity. Instead of worrying about unused 529 funds, parents may be able to turn them into a powerful financial head start for the next generation.

Understanding your options can help you make the most of their education savings.

Using 529 funds

For many families, the most straightforward use of a 529 plan is to pay for college education expenses. Qualified withdrawals are generally free from federal income tax, and many states also allow tax-free withdrawals, similar to federal rules.

However, 529 plans can be used more broadly than many families realize. In addition to traditional college expenses, funds may also be used for:

• K–12 expenses: up to $20,000 per year per beneficiary beginning in 2026 including tuition and certain educational expenses
• Apprenticeship programs: including program fees, books, supplies, and required equipment for registered apprenticeship programs
• Student loan repayment: use a lifetime limit up to $10,000 per beneficiary toward qualified student loans
• Professional credentials & career training: tuition, fees, books, supplies, exam costs, and required continuing education for qualified postsecondary credentialing and licensing programs
• Special needs services: educational therapies, services, and required equipment necessary for enrollment or attendance at an eligible educational institution

And if education plans change or are delayed, the funds do not have to be used immediately. The account can remain invested and continue growing tax-deferred until they are needed in the future.

Changing the Beneficiary

Leftover 529 funds do not necessarily have to go unused. In many cases, the account owner can change the beneficiary to another eligible family member, such as a sibling, first cousin, grandchild, or even themselves. In many situations, this allows families to redirect education savings without triggering taxes.

It is important to understand that changing the beneficiary of a 529 plan may have tax implications in certain situations. For example, gift and generation skipping transfer (GST) tax rules can apply when the new beneficiary is in a lower generation than the old beneficiary. The statute provides relief when the new beneficiary is in the same or higher generation and is a family member.

For this reason, beneficiary changes are often best reviewed as part of a broader estate and tax planning strategy.

Withdrawing the Funds for non-educational purposes

Families may also withdraw funds for non-educational purposes. However, the earnings portion of a non-qualified withdrawal is typically subject to ordinary income tax as well as a 10% federal penalty, which reduces some of the tax advantages of the account.

Because of these potential tax consequences, many families prefer to explore other planning strategies before taking a non-qualified withdrawal.

Options for unused 529 funds

An opportunity: Turning education savings into retirement savings

Under current rules, certain unused 529 funds are allowed to be rolled into a Roth IRA for the beneficiary.

This can be particularly meaningful for young adults because it allows them to begin building retirement savings, giving those funds more time to grow. Starting early is one of the most powerful advantages an investor can have, and even modest contributions can grow significantly over time thanks to the power of compounding returns.

Unused 529 funds may be moved through a special trustee-to-trustee rollover from a long-standing 529 plan into a Roth IRA owned by the beneficiary.

To qualify, several requirements must be met:

• The 529 plan must have been maintained for the beneficiary for at least 15 years
• Contributions made within the last 5 years (and the earnings on those contributions) are not eligible for rollover
• The Roth IRA must be in the beneficiary’s name, and the beneficiary must have earned income at least equal to the rollover amount in that year
• The rollover counts toward the beneficiary’s annual IRA contribution limit ($7,500 in 2026 for those under the age of 50)

There is a lifetime rollover limit of $35,000 per beneficiary.

The power of starting early

To understand why this opportunity can be so valuable, consider a simple example:

Let’s say a 24-year-old beneficiary has $35,000 left in a 529 plan that satisfies the 15-year rule, and none of the remaining funds are from contributions made within the last five years. If the beneficiary is working and earns at least $7,500 in 2026, they could transfer up to that amount from the 529 plan directly into a Roth IRA, assuming they don’t make any other IRA contributions. This reflects the current annual IRA contribution limit for someone under the age of 50. The remaining balance cannot be moved all at once. Instead, it can be transferred gradually over future years, subject to the requirements stated above.

Because the money is held within a Roth IRA, qualified withdrawals in retirement would generally be tax-free. In other words, unused education savings could ultimately become a meaningful source of retirement income later in life.

Few young adults begin saving for retirement this early, which is what makes this option especially powerful.

Creating a lasting financial advantage for the next generation

529 plans were created to help families save for education, but today they can support a broader range of planning goals than many families realize. What began as a college savings tool can now potentially support a range of financial goals—from education expenses and student loan repayment to helping the next generation begin building retirement savings.

Because these options come with different rules, tax considerations and long-term implications, thoughtful planning can make a meaningful difference. Decisions about how and when to use 529 funds, whether redirecting them to another family member, rolling unused funds into a Roth IRA, or incorporating them into broader family gifting strategies can significantly affect the long-term value of those savings.

For many families, reviewing their 529 strategy as children approach college, or even after graduation, can uncover opportunities they may not have realized were available.

A note on state taxes:

State tax rules may differ from federal rules when it comes to 529 plans, and those rules can change over time. While certain 529-to-Roth IRA rollovers may be federal tax-free if all requirements are met, some states may not fully conform to the federal treatment and may tax all or part of the transaction or may require recapture of prior state tax deductions or credits claimed for 529 contributions. State treatment may also vary for other 529 uses, including K–12 expenses, student loan repayment, and qualified credentialing expenses. Families should review the rules in the state where they file income taxes, as well as the applicable 529 plan disclosure materials, before taking a distribution or rollover.