Thanks to the Secure Act 2.0 passed in 2022, there is another option for the overfunded 529 starting 2024. In the past, if you used those funds for non-education purposes, you had to pay your tax income and a 10% penalty on the earnings.

Some of the rules to consider are:

  1. You can roll the amount to the beneficiary of the 529 (not the owner)
  2. The 529 should have been in place for 15 years of more (set up the plan as soon as possible)
  3. The transfer amounts should come from contributions at least five year old (you cannot contribute today and transfer to the Roth IRA immediately after)
  4. The limit to roll over is the Roth IRA limit (for 2024, $7k normal / $8k if beneficiary over 50)
  5. The limit is $35,000
  6. The rolled over funds will go to a Roth IRA trustee (not the beneficiary directly)

Note that for certain States there are tax deductions for contributions to 529. However, the roll over might be taxed in certain States.

Link CNN – 529 rollover to a Roth IRA

Link The Tax Adviser – A retirement savings head start: 529-to-Roth rollovers