Money in College Savings Accounts Can Now Go Toward Retirement

Starting this year, some of the money in 529 college savings accounts can be used for retirement if it’s not needed for education.

New rules under the federal law known as Secure 2.0 allow up to $35,000 in a 529 account to be rolled over to a Roth individual retirement account for the beneficiary of the 529 account if certain conditions are met.

State-sponsored 529 accounts, named for a section of the tax code, are used to pay for education expenses — mainly college costs. Money deposited in the accounts grows tax free and can be withdrawn tax free to pay for eligible expenses like tuition, housing, food and books.

The new Roth option is aimed at parents who may be reluctant to save in a 529 because they worry about having to pay income taxes and a penalty if for some reason the funds aren’t needed for college and they want to withdraw the money.

“It is parents’ No. 1 objection to opening a 529,” said Vivian Tsai, chair emeritus of the College Savings Foundation, a group that includes big financial firms that run the state college savings programs. “The barrier is really psychological.” (Ms. Tsai is also senior director and head of relationship management for the education savings unit at TIAA, a large investment firm that manages 529 plans in seven states.)

Many families struggle to save for college, and accumulating “too much” money is usually not a problem. “The vast majority of account holders do not save enough,” Ms. Tsai said.


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