Is it a good idea to use 529 plans for Roth conversions?

Q:

My husband and I have a 529 college savings plan for our high schooler, and we heard that you can now use your 529 funds for a roll over into a Roth. The performance of our 529 has been good, so it seems like a slam dunk to save some excess money in the 529 to take advantage of this performance and then, after our student graduates, convert the excess into a Roth for our retirement. Are we right?

A:

You sound excited about being able to convert unused 529 savings into a Roth account. So, we hope the fact that we’re looking out for your financial interests will help you forgive us when we say: Using your 529 savings for a Roth conversion is a bad idea for a number of reasons.

Understanding Roth conversions and 529 plans

Because this will be read by people with various levels of financial knowledge, let’s define our terms. What’s a Roth conversion?

• A Roth conversion entails rolling over money from a tax-deferred retirement account like a 401(k) or an IRA into a Roth account.
• Typically, when you do the rollover, you need to pay income taxes on the funds. (When you roll over unused 529 savings into a Roth, you don’t have to pay taxes on the rollover, but that’s only if you meet a list of requirements, which we will discuss.)  

Once the money is in the Roth account, you can eventually withdraw the money tax-free provided the withdrawals meet a number of requirements. Hopefully, the account will have appreciated by then.

While Roth conversions may make sense for a number of people, they don’t when it comes to using a 529 plan for one. But, what’s a 529 plan again?

• A 529 savings plan is a tax-deferred account that can be a great way to save money for college, if it offers solid investment options. Contributions to a 529 plan are after-tax but earnings in the account can grow tax-free.
• Distributions are tax-free provided they are used for qualified educational expenses.
• Some state-sponsored 529s even offer state income tax deductions for 529 contributions.

A 529 plan is not a retirement strategy. Not using a 529 plan for its intended purpose comes with plenty of headaches.

Why are 529 plans not ideal for Roth conversions?

So, what happens when you try to use unused 529 savings for Roth conversions? You run into a lot of strict rules and limitations before you can even start converting. Some aspects of the process may remain up for interpretation, so consult your financial planner who can work with your tax professional, but here are some of the major requirements.

• To use 529 funds for a Roth conversion, the 529 account needs to have been opened for at least 15 years.
• The 529 contributions being used can’t have been made to the 529 within the last five years.
• To convert the funds, you will need to change the beneficiary of the 529 account to one of you (from your high schooler), but you can’t change it to both parents. A 529 can only have one beneficiary. The Roth will be in the name of that same beneficiary.

Changing the beneficiary may restart the 15-year clock on the account for the purposes of the Roth rollover, so again, consult with your planner and tax professional before you start the process. If you need to restart the 15-year clock, is the idea already dead in the water?

But there’s more.

• You are limited to converting up to $35,000 from a 529 plan.
• Each year, you can only convert up to the Roth annual contribution limit, which for 2025 is $7,000 ($8,000 with the $1,000 catch-up for those aged 50 and over).
• Once you’re able to start converting the funds, who’s to say the rules around conversion wouldn’t have changed again?

(As an aside, it appears that you’re using your 529 plan to convert to a Roth because of the 529’s investment performance. You’re taking a needless risk with your money. There’s no guarantee that the 529 plan’s performance will continue up to the time of the Roth conversion.)

Better alternatives to using 529 plans for Roth conversions

Given all the rules and restrictions around using excess 529 savings for Roth conversions, it makes more sense just to open a Roth IRA, or Roth 401(k), provided a Roth account makes sense for your financial plan in the first place.

Edelman Financial Engines planners advise that you use investment vehicles as they’re intended because if you don’t, it can result in needless complexity and could even take you off track of your goals.

In fact, before you fund a 529 plan for your child (or anyone else), first make sure you’re on track with funding your own retirement account. It’s the “put your own oxygen mask on first” principle. You shouldn’t try to help others financially if you’re not already financially stable.

How to retain financial flexibility when saving for college

Also, when saving for your child’s college expenses, don’t assume you should only use a 529 account, much less overfund one for a Roth conversion.

You want to make sure you retain flexibility with your money.

It may make sense to put part of your college savings into a taxable account. This gives you the option to use the money for purposes other than your child’s education, such as an unexpected crisis, or if your child decides not to finish college or decides not to go at all.

Keep it simple

Like all of us, your heart is in the right place when it comes to your money, but sometimes we overthink our financial path to retirement.

One of the luxuries of having a financial plan is that it can simplify your life: All you have to do is stick to your plan. If you have a question about the latest and greatest retirement strategy in the news, your financial planner is there to quickly separate the wheat from the chaff.