Kid Skipping College? Don't Panic. How to Move $35,000 from a '529 Plan' to a Roth IRA Penalty-Free (New Rule)

For years, parents have asked the same terrifying question about 529 College Savings Plans:

"What if my child gets a full scholarship or decides not to go to college? Is my money trapped?"

In the past, the answer was painful: You had to pay income tax plus a 10% penalty to withdraw the earnings.
But thanks to the SECURE 2.0 Act, the game has changed completely.

Starting in 2024, you can now roll over unused 529 funds directly into a Roth IRA for the beneficiary. No taxes. No penalties. You just jump-started their retirement by decades.

Disclaimer: This is a new IRS rule. Specific state tax laws may vary (some states might still tax the rollover). Consult a tax professional before executing the transfer.

Kid Skipping College? Don't Panic.

1. The Magic Number: $35,000 Lifetime Limit

This isn't an unlimited loophole. The IRS allows you to move a lifetime maximum of $35,000 per beneficiary from a 529 plan to a Roth IRA.

• Why it matters: $35,000 compounding tax-free for 40 years (at 8%) turns into over $760,000 by the time your child retires.
• The Benefit: You transform "Education Money" into "Retirement Wealth" without losing a cent to Uncle Sam.

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2. The Catch: The "15-Year Rule"

You cannot open a 529 today and dump it into a Roth tomorrow. Congress added strict guardrails to prevent abuse.

🛑 Key Eligibility Requirements

• Account Age: The 529 account must have been open for at least 15 years. (Start early!).
• 5-Year Lookback: Any contributions (and earnings) made in the last 5 years cannot be rolled over. Only "old money" is eligible.
• Earned Income: The beneficiary (your child) must have earned income (wages) equal to or greater than the amount being rolled over that year.

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3. It Counts Towards Annual Limits

You cannot transfer the entire $35,000 in one day. The rollover is subject to the Annual Roth IRA Contribution Limit.

• 2024/2025 Limit: $7,000 (for those under 50).
• Strategy: You would need to move $7,000 a year for 5 years to reach the $35,000 cap.

Important: If you do a rollover, your child cannot contribute their own money to the Roth IRA for that year. The limit is shared.

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4. Why This Removes the Fear of "Over-Saving"

Many parents under-fund their 529s because they are afraid the money will get stuck.
This new rule acts as a safety valve.

• Scenario A: Child goes to Harvard. You use all the money tax-free. (Great).
• Scenario B: Child becomes a YouTuber and skips college. You roll $35,000 into their Roth IRA. (Also Great).

There is no "losing scenario" anymore, as long as you stay within the $35k buffer.

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5. Can I Change the Beneficiary to Myself?

Yes! If your child doesn't use the money, you can change the beneficiary to yourself (if the account has been open for 15 years) and roll it into your Roth IRA.

Note: The 15-year clock might reset when you change beneficiaries. IRS guidance on this specific detail is still evolving, so proceed with caution.

The Ultimate "Generation Wealth" Tool

The 529 Plan is no longer just for tuition. It is now a versatile, tax-advantaged wealth transfer vehicle.

If you were on the fence about opening a 529, start the 15-year clock today. Even a small deposit ($50) starts the timer.

Action Plan:

1. Open a 529 Plan NOW: Even if your child is a newborn. The 15-year clock starts the day you open it.
2. Don't Overstuff It: Aim to save for 50-75% of projected college costs. If you overshoot, the $35k rollover covers the excess.
3. Keep Records: Save your account opening statements. You will need to prove the "15-year age" to the IRS later.

Helpful Resources:
Fidelity: 529 to Roth IRA Rule Explained
IRS Notice 2024-02: Guidance on SECURE 2.0