Generation to Generation

Finding the solution to the overfunding problem is most often the responsibility of the 529 Savings Account’s original donor, known as the “account owner.” The account owner typically retains significant levers of control over the 529 Savings Account, whereas the child for whom the account is established, known as the “designated beneficiary,” has no direct control. Because 529 Savings Accounts can be in place for 20+ years, the account owner should take steps to ensure a suitable contingent account owner can step into the controlling role if he or she becomes incapacitated or dies.

A common solution is for the account owner to change the 529 Savings Account’s designated beneficiary to another member of the designated beneficiary’s family, such as a child, sibling, spouse, or first cousin. This change can be made at any time and only the account owner needs to sign the required forms. Thus, if the account owner’s granddaughter has finished her post-secondary schooling with money left over in her 529 Savings Account, the account owner can change the designated beneficiary to one of her cousins. While this option provides comfort that the monies will still be put to good use, it can skew the benefits that the family originally intended be spread out equally among all children or grandchildren and favor, for example, the child who stayed in school to pursue a graduate degree with more tax-advantaged funds than the child who chose to go into the military.

A more attractive solution to the overfunding dilemma was ushered in by the SECURE 2.0 Act. Under this Act, the leftover assets of a designated beneficiary’s 529 Savings Account (subject to a cap) can be rolled over into a Roth IRA for the same designated beneficiary via a trustee-to-trustee transfer, so long as a number of conditions are met. The forms in this case need to be signed by both the account owner and the designated beneficiary. The conditions are:

• the 529 Savings Account must have been open for at least 15 years;
• no more than $35,000 in total can be transferred per designated beneficiary;
• the amount transferred each year is subject to the annual IRA contribution limits, so it can take years to reach the per-beneficiary cap (in 2026, the contribution limit is $7,500 for those under age 50);
• the funds transferred cannot include any contributions (or earnings on those contributions) over the prior five years; and
• the beneficiary must have earned income equal to or exceeding the rollover amount.

If the 529 Savings Account has a leftover balance greater than $35,000, the best approach may be to roll over up to $35,000 (in portions, subject to required limits) over years and then, for any balance remaining in the account, change the designated beneficiary to another family member, understanding that this change will restart the 15-year clock for the new designated beneficiary of the account.

Not all state 529 plans are exactly the same, so if you find yourself facing an overfunded 529 Savings Account, pay attention to the particular rules of your account and consult your advisor on the solutions available to you.