New Regulations to 529 Plans

February 3, 2023

David Neuman, JD

Under legislation signed into law last month with the passage of the Setting Every Community Up for Retirement Enhancement (“SECURE 2.0”), investors can roll up to $35,000 from a 529 account into a Roth individual retirement account starting in 2024. The move converts leftover money originally intended for a child’s college (or kindergarten through 12th grade) costs into retirement dollars, all without costing the beneficiary a tax bill. With tax-free growth and withdrawals, Roths are an engine of outsize savings and a favorite of wealth advisors, especially those to the affluent.

The benefit is part of a $1.7 trillion federal spending bill that contains a welter of provisions aimed at improving Americans’ retirement readiness, including that of higher earners. Among the package’s changes:


  • The age to start taking required minimum distributions from traditional individual retirement plans and 401(k)s rises to 73 this year and to 75 a decade later, giving accounts more time to grow in value.
  • Penalties for not taking RMDs are cut in half.
  • Companies can make matching contributions to employer-sponsored Roth accounts.
  • The current $1,000 catch-up contribution to traditional IRAs will be indexed for inflation for those aged 50 and older come 2024.


Assuming a conservative, long-term return of 6%, $35,000 in a Roth would grow to more than $150,000 after 25 years, and to over $268,000 after 35 years.


Generally, a parent or grandparent sets up a 529 for a younger family member. Owners can also set one up for themselves or change a beneficiary, to, say, a younger child if the older one doesn’t go to college or gets a scholarship and doesn’t need all of the money. If a beneficiary gets a full scholarship to college, the penalty for withdrawing the cash is waived.


Previously, if a saver was stuck with money in a 529 because their child didn’t go to college the only way to get the funds out was to pay the tax bill. Now $35,000 can be converted into a Roth, tax-free. The new law says that a 529 account has to be in existence for at least 15 years before being rolled into a Roth IRA. Additionally, contributions and growth from the past five years can’t be shifted over.


Written by David Neuman, JD
Tax & Legal Manager at LMC


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