Senate Bill Proposes Unlimited Roth IRA Rollovers From Unused 529 Plans
A Senate bill would allow savers to transfer all unused 529 college savings to a Roth IRA, giving them greater flexibility — and their children a head start on retirement savings.
A proposed bill could be a game changer for families with well-funded 529 plans. Sens. Ted Cruz, R-Texas, and Lisa Blunt Rochester, D-Del., are calling for an end to a current law that places a $35,000 lifetime cap on rollovers from 529 education savings plans to Roth IRAs.
Both sponsors of the bipartisan bill, dubbed the 529 Retirement Enhancement Act of 2026, say it will give parents and 529 account owners more flexibility to save and invest in a child’s future.
If passed, the bill would further reduce the uncertainty about what happens to unspent money in 529 plans, adds Paul Stanley, a wealth adviser at Arca.
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"It would be a positive development," says Stanley. "One of the biggest impediments to people saving money in a 529 was the risk that the money was going to just go to waste (and be subject to taxes and penalties) if the kid didn't go to college."
While 529s are not so-called "use it or lose it" plans, if you withdraw savings for nonqualified educational purposes, the earnings portion is taxed as ordinary income plus a 10% federal penalty. Account holders, though, can retain the funds for future qualifying educational expenses or change the beneficiary to an eligible family member, such as a sibling.
However, having the ability to roll over more 529 dollars into a Roth IRA, a retirement fund that offers tax-free withdrawals, enables parents to avoid taxes and penalties to access unspent 529 savings and gives their child a jumpstart on retirement savings.
The SECURE Act 2.0, passed by Congress at the end of 2022, allows individuals to roll over $35,000 from a 529 plan into a Roth IRA. Aside from eliminating the $35,000 lifetime cap on unused funds, the proposed legislation keeps all other requirements from the 2022 law, which allows excess 529 assets to be transferred into a Roth IRA over time rather than leaving the assets stranded in 529 accounts.
"The initial SECURE Act was a really, really great idea," explains Ernie Wingard, a financial adviser at Capital Choice Financial Group. "This proposal (if passed) will make it even better."
How the new bill could boost financial flexibility
When introducing the bill, Cruz said the existing law "penalizes" families who build up savings in a 529 plan but don't use all the money because their child got a scholarship, went to a less expensive school, or chose not to attend college.
The new bill, adds Blunt Rochester, gives 529 savers other uses for the money if education plans change.
"Families should be able to preserve financial flexibility regardless of what their child's education decisions are years down the road," says Blunt Rochester.
529s are a popular educational savings tool. Funded with after-tax dollars, the money in these savings accounts grows tax-deferred. While there's no federal upfront tax deduction for contributions, some states offer deductions for in-state 529 plans, according to Fidelity Investments.
Increasingly, the dollar amounts that pile up in 529s can reach sizable numbers. Why? There's no annual federal contribution limit for 529 plans, although each state's plan sets a maximum total balance per beneficiary. For gift-tax purposes in 2026, contributions of up to $19,000 per person ($38,000 for a married couple) per 529 beneficiary qualify for the annual exclusion. What's more, in 2026 a 529 contributor can front-load 529 deposits, giving five years of annual gifts in a single year, or $95,000 per person or $190,000 for a married couple.
These huge balances can potentially result in unused dollars. The downside of using leftover 529 dollars for nonqualified educational expenses is that they are subject to income tax and a 10% federal tax penalty on any earnings associated with the distribution, according to Fidelity.
"That's where a transfer to a Roth IRA could make sense," according to a Fidelity blog post.
Four things to know about 529 to Roth IRA rollovers
Consider a few things before transferring unused 529 dollars to a Roth IRA.
1. The 529 plan in the beneficiary's name must have been open for at least 15 years prior to the rollover. The new rollover IRA must also be in the beneficiary's name.
2. The amount rolled over in any given tax year must not exceed the Roth IRA annual contribution limit applicable to the beneficiary. The Roth contribution limit for 2026 is $7,500 for those under 50. Because transfers are capped annually, moving a large 529 balance into a Roth IRA can take many years — meaning families must start the process early while the child is still working and earning income.
3. The transfer amount must come from contributions to and earnings from the 529 account at least five years prior to the transfer date.
4. The beneficiary must have earned income that equals or exceeds the amount rolled over to a Roth IRA in any given year.
Turning leftover college funds into a multimillion-dollar nest egg
Passing the bill would likely boost 529 savings plans, as parents would no longer have to worry about the downside of this savings product if their kid doesn't go to college. "It gives the 529 more power," says Wingard.
Extending the amount of time 529 savings can stay tax-deferred can add up to huge dollars for beneficiaries through compounding. Under current law, Wingard notes that a 22-year-old who rolls over the maximum $35,000 and earns a 9% annual return can watch that money double every eight years, turning it into $1.12 million by age 62.
"That’s why I think this bill is huge," says Wingard.
But eliminating the lifetime cap takes that growth potential to a whole new level, as shown in the table below.
Under the proposed bill, if that same 22-year-old has $75,000 in excess 529 plan funds, they could roll over the entire amount over 10 years. By age 62, those tax-free contributions could compound into an estimated $2.1 million nest egg.
"Financial flexibility is incredibly important," says Stanley.
Currently, families concerned about penalties for non-educational distributions from 529s are reluctant to put all college savings in a single 529 bucket.
In contrast, the new bill "allows planners to look at planning purely from the perspective of saving in the best tax-preferred way we can," says Stanley.
Scenario factors |
Proposed rule (unlimited cap) |
Current rule ($35K cap) |
Initial unused 529 balance at age 22 |
$75,000 |
$75,000 |
Amount rolled over |
$75,000 (over 10 years at annual limits) |
$35,000 (rolled over in about 5 years) |
Remaining 529 balance |
$0 |
$40,000 |
10% Penalty and tax on transfer |
$0 (tax free) |
$0 on $35k Roth / taxes apply to non-qualified cash-outs |
Estimated value at age 62 (at 9% returns) |
$2.1 Million (100% tax-free) |
$1.12 Million (tax-free Roth) plus taxable / stranded 529 Funds |
Will the bill pass?
Financial advisers are split on whether Congress will pass the bill. Stanley thinks the odds are low, citing high U.S. deficits and lost tax revenue. But Wingard thinks the odds are higher, as both parties would benefit from making it easier for families to save for their children's futures.
The bottom line: If the child goes to college, the money grows tax-deferred under the proposed changes. And if the child takes another route in life, the dollars keep growing tax-deferred and become a retirement nest egg.
"That’s going to give your kid a leg up in retirement," says Stanley.
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