A 529 plan is one of the most powerful tax-advantaged savings tools available for education expenses. Whether you are saving for college tuition, K-12 costs, or professional credentials, a 529 education savings plan offers investment growth that is free from federal income tax when used for qualified purposes. But what happens when the beneficiary does not use all the funds? Thanks to the SECURE 2.0 Act and more recent changes under the One Big Beautiful Bill Act (OBBBA), 529 plan owners now have more flexibility and options than ever before.

What Is a 529 Plan?

A 529 plan is a state-sponsored investment account designed to help families save for education. These college savings plans allow parents, grandparents, and other contributors to build a portfolio of investments (typically mutual funds, index funds, or age-based asset allocation portfolios) that grow without federal income tax. In Arizona, contributors can also claim a state income tax deduction of up to $2,000 per beneficiary for single filers ($4,000 for married couples filing jointly) on contributions to any state's 529 plan.

529 plans can be used for a wide range of education expenses, including college tuition, room and board, books, supplies, and equipment. They also cover up to $10,000 per year in student loan repayments (lifetime limit per borrower) and K-12 tuition. Most plans offer multiple investment options, ranging from conservative bond-heavy portfolios to growth-oriented stock portfolios, as well as enrollment-based portfolios that automatically adjust the asset allocation as the beneficiary approaches college age.

OBBBA Expands Qualified 529 Plan Expenses in 2025 and 2026

The One Big Beautiful Bill Act, signed on July 4, 2025, significantly broadened how 529 plan funds can be used. These changes reduce the risk of having "leftover" funds in a 529 account.

K-12 Expense Expansion (Effective July 5, 2025)

Qualified K-12 expenses now extend well beyond tuition. Starting July 5, 2025, 529 distributions can cover:

  • Curriculum materials and textbooks
  • Tutoring services (from qualified, unrelated tutors outside the home)
  • Standardized testing fees (SAT, ACT, AP exams)
  • Dual enrollment in postsecondary courses
  • Educational therapy for students with disabilities
  • Online educational programs

Higher K-12 Annual Cap (Effective January 1, 2026)

The annual cap on tax-free K-12 distributions doubled from $10,000 to $20,000 per beneficiary starting in tax year 2026. This applies per beneficiary across all 529 accounts, so a family with three children in K-12 could withdraw up to $60,000 annually for qualified expenses.

Credentialing Programs

529 plans can now fund postsecondary credential programs, including tuition, exam fees, books, and supplies for programs approved under the Workforce Innovation and Opportunity Act (WIOA), state-licensed professional programs, and military credentials. This opens 529 funds to trade certifications, apprenticeships, and professional licensing.

Rolling Over 529 Funds to a Roth IRA

Even with expanded uses, some 529 account owners still end up with unused balances. The SECURE 2.0 Act, passed in December 2022, created a new option: tax-free and penalty-free rollovers from a 529 plan to a Roth IRA for the plan's beneficiary. This provision took effect on January 1, 2024. (For more on SECURE 2.0 retirement changes, see our overview of the 2023 appropriations bill's impact on retirement savings.)

Previously, using 529 withdrawals for anything other than qualified education expenses would trigger income taxes plus a 10% penalty on the earnings portion. Account owners could change the beneficiary to another qualifying family member, but that was not always a practical solution. The Roth IRA rollover provides a third path, effectively converting unused education savings into tax-free retirement savings.

529 to Roth IRA Rollover Rules

The rollover must meet all of the following requirements:

  • 15-year account age: The 529 plan must have been maintained for the same beneficiary for at least 15 years. Changing the beneficiary may reset this clock, though the IRS has not issued final guidance on this point.
  • 5-year contribution seasoning: Only contributions made more than five years before the rollover date (and their associated earnings) are eligible. Contributions made within the past five years cannot be rolled over.
  • Same beneficiary requirement: The Roth IRA must be owned by the same person who is the designated beneficiary of the 529 plan. The account owner (typically a parent or grandparent) cannot roll the funds into their own Roth IRA.
  • Annual contribution limit applies: The amount rolled over in any year, combined with any other IRA contributions by the beneficiary for that year, cannot exceed the Roth IRA annual contribution limit. For 2025, the limit is $7,000 ($8,000 for those age 50 and older). For 2026, the limit is $7,500 ($8,600 for those 50 and older).
  • Earned income requirement: The beneficiary must have earned income at least equal to the rollover amount in the year of the transfer.
  • $35,000 lifetime cap: The total amount rolled over from all 529 accounts for a single beneficiary cannot exceed $35,000 over the beneficiary's lifetime.
  • Direct transfer required: The rollover must be completed as a trustee-to-trustee transfer. You cannot withdraw funds from a 529 and then deposit them into a Roth IRA.

Key Advantages of the 529-to-Roth Rollover

This rollover option offers several notable benefits for families with unused 529 balances:

  • No income limits: Unlike regular Roth IRA contributions, the 529-to-Roth rollover is not subject to modified adjusted gross income (MAGI) limits. High-income families who would otherwise be ineligible for direct Roth contributions can still use this pathway.
  • Tax-free growth: Once in a Roth IRA, the funds continue to grow tax-free and can be withdrawn tax-free in retirement (after age 59½ and a 5-year holding period).
  • Head start on retirement: For young beneficiaries who finish their education with leftover 529 funds, this rollover provides decades of tax-free compounding in a Roth IRA.
  • No penalty: The transfer avoids the 10% penalty that would apply to nonqualified 529 withdrawals.

Practical Example: How It Works Over Time

Suppose a parent opened a 529 plan for their child in 2009 and contributed regularly. The child graduated from college in 2026 with $30,000 remaining in the account. Because the account has been open for more than 15 years and the earliest contributions were made well over five years ago, the beneficiary can begin rolling funds into a Roth IRA.

At the 2026 annual limit of $7,500, it would take approximately four to five years to transfer the full $30,000 (assuming no other IRA contributions by the beneficiary). The beneficiary must have earned income each year. The $35,000 lifetime cap would not be an issue in this scenario.

Arizona 529 Plan Tax Considerations

Arizona offers a state income tax deduction for 529 plan contributions of up to $2,000 per beneficiary for individual filers and $4,000 for married couples filing jointly. Arizona is also a "tax parity" state, meaning the deduction applies to contributions to any state's 529 plan, not just Arizona's AZ529 plan.

At Arizona's flat 2.5% income tax rate, the maximum state tax savings is $50 per individual or $100 per couple. While modest, this benefit compounds over years of contributions. Qualified withdrawals from 529 plans are also exempt from Arizona income tax.

For the 529-to-Roth rollover specifically, the federal treatment is clear (tax-free and penalty-free when requirements are met), but state treatment may vary. Consult a qualified tax advisor to confirm how Arizona treats the rollover for state income tax purposes.

Frequently Asked Questions

Can I roll over my child's 529 plan into my own Roth IRA?

No. The Roth IRA must be owned by the designated beneficiary of the 529 plan. If you (the parent) are not the beneficiary, you cannot receive the rollover.

What if my 529 plan is less than 15 years old?

You must wait until the account reaches the 15-year mark before any rollover is permitted. The clock starts from the date the account was established for the current beneficiary.

Do Roth IRA income limits apply to 529 rollovers?

No. The usual MAGI-based phase-outs for Roth IRA contributions do not apply to 529-to-Roth rollovers. This is one of the key benefits for high-income families.

Can I roll over the full $35,000 in one year?

No. The rollover is subject to the annual Roth IRA contribution limit ($7,500 for 2026 for those under 50). At that pace, reaching the $35,000 lifetime cap would take approximately five years.

What happens to earnings in the 529 account?

Earnings attributable to contributions made more than five years ago are eligible for rollover along with those contributions. Earnings on contributions made within the past five years are not eligible.

Has the IRS issued final guidance on 529-to-Roth rollovers?

As of mid-2026, the IRS has not released comprehensive final guidance on all aspects of Section 126 of SECURE 2.0. Several practical questions remain open, including how changing a beneficiary affects the 15-year clock. Work with a knowledgeable tax advisor to navigate these details.

Other Options for Unused 529 Plan Funds

The Roth IRA rollover is not the only solution for leftover 529 balances. Consider these alternatives:

  • Change the beneficiary: Transfer the account to another qualifying family member (sibling, niece, nephew, or even a first cousin) without tax consequences.
  • Use for graduate or professional school: 529 funds can cover tuition and expenses for graduate programs, law school, medical school, or MBA programs.
  • Pay student loans: Up to $10,000 in lifetime 529 distributions per borrower can be used for qualified student loan repayments.
  • Cover credentialing and trade programs: Under the OBBBA, 529 funds now cover postsecondary credential programs, apprenticeships, and professional certifications.
  • Keep the account open: There is no deadline to use 529 funds. The account can remain open indefinitely for the beneficiary or future family members.
  • Roll over to an ABLE account: Under OBBBA, tax-free rollovers from 529 plans to ABLE accounts for individuals with disabilities are now permanently available.

How K&R Taxes Can Help

Deciding what to do with unused 529 plan funds involves navigating complex rules around contribution timing, account age, annual limits, and tax implications at both the federal and Arizona state level. The interaction between SECURE 2.0 rollover provisions, OBBBA expense expansions, and your family's broader financial plan requires careful analysis.

At K&R Taxes, we help Arizona families and individuals develop strategies that maximize the tax advantages of their retirement and education savings. Whether you are considering a 529-to-Roth rollover, evaluating expanded 529 uses under the OBBBA, or planning contributions for the year ahead, our team can guide you through the details. Contact us to schedule a consultation.