Since their establishment in 1996, Section 529 Plans have become a highly popular college savings vehicle. With their offer of tax-free distributions for Qualified Higher Education Expenses these plans can help parents and grandparents tackle the formidable task of saving for the ever-rising cost of college.
But it’s difficult to predict how much college will cost and parents sometimes end up with balances remaining in Section 529 plans after a child’s education is complete.
What now?
In general, money taken out of a 529 Plan that isn’t used for Qualified Higher Education Expenses will be subject to taxes and penalties.
But you’ve got options.
Wait
Section 529 Plans do not have a deadline by which the money must be used. That means if you’ve got balances sitting in a 529, those balances can remain in place more or less indefinitely.
This gives your child time to decide if they will pursue further education.
Transfer or Re-designate
Section 529 Plans allow for intra-family transfers and re-designation of the beneficiary.
That means if your child with left-over money has a sibling that could use the funds, money can be transferred from one Section 529 Plan to the plan of another beneficiary within the family.
You can also re-designate the beneficiary on the account. The new beneficiary must be a family member as defined by the IRS.
A family member includes:
- Spouse of the beneficiary
- Child or descendant of the beneficiary[1]
- Sibling of the beneficiary
- Parents and ancestors of the beneficiary[2]
- Nieces and nephews of the beneficiary
- Aunts and uncles of the beneficiary
- In-laws of the beneficiary[3]
- Spouse of any of the relatives listed above
The biggest difference between transferring and re-designating is that a transfer can be partial while a re-designation would affect the entire account.
Rollover to a Roth IRA
One of the newest options for old 529 balance is the option to roll over to a Roth IRA. A Section 529 Plan beneficiary can roll over up to $35,000[4] from a Section 529 Plan to a Roth IRA in their name.
There are several requirements to make this transaction work.
The 529 plan must have been open for at least 15 years before executing a rollover.
The maximum amount that can be rolled over in any given year is governed by that year’s Roth IRA contribution limit. So, if you were using this option in 2026, the maximum amount you could roll over from a 529 to a Roth IRA would be $7,500.
Completing a maximum rollover from a 529 to a Roth IRA would also bar the Roth IRA owner from contributing to a Roth or Traditional IRA for that year.
Finally, the 529 beneficiary/Roth IRA owner must have earned income at least equal to the amount rolled over in the year of the rollover.
More on Section 529 Plan to Roth IRA Rollovers
Saving for college is a major undertaking and getting it right can be challenging. But with a little planning, you can make good use of any “unused” 529 balances.
Learn more about saving for college
The information offered is provided to you for informational purposes only. Baird is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action.