In the face of soaring college costs, many parents opt for 529 plans early on, hoping to give their children a financial head start on higher education. These plans, while not offering tax-deductible contributions, do allow for tax-deferred growth, with the sweetener that earnings used for qualified education expenses can be withdrawn tax-free.

However, should these earnings be used for other purposes, they may be subject to income taxes plus a 10 percent penalty, advises DunlapSLK, a CPA and business advisory firm based in Chalfont.

So what happens when there’s money left over? Maybe your child skips college, lands a full-ride scholarship, or opts for a more affordable educational path than you’d planned for. Traditionally, you’d face a choice: swallow the tax and penalty to use the funds freely or explore other, more tax-efficient avenues.

Enter a game-changing option starting in 2024: the 529-to-Roth IRA transfer. This new route allows for the transfer of unused 529 plan funds to a Roth IRA in the same beneficiary’s name, avoiding taxes and penalties.

With the ability to avoid tax and penalties on unused funds and at the same time help beneficiaries start saving for retirement, a 529-to-Roth IRA rollover is certainly an appealing option.

It’s not without its rules, though.

There’s a lifetime transfer cap of $35,000 per beneficiary, the 529 plan must have been open for at least 15 years, and the rollover must be through direct trustee-to-trustee transfer. Plus, the funds can’t include contributions from the preceding five years or their earnings, and they’re subject to Roth IRA annual contribution limits.

Learn more from DunlapSLK about the new 529-to-Roth IRA option and other options available for avoiding tax and penalties on unused 529 plan funds.