Key Points
- A bipartisan Senate bill would eliminate the $35,000 lifetime cap on tax-free rollovers from a 529 plan to the beneficiary’s Roth IRA.
- The 15-year account rule, the five-year contribution lookback, and the annual Roth IRA limit would all remain.
- Nothing changes unless Congress passes the bill, and the new rules would first apply in the tax year after it becomes law.
Senators Ted Cruz (R-TX) and Lisa Blunt Rochester (D-DE) introduced the 529 Retirement Enhancement Act of 2026 (S. 5550) last week. The bipartisan bill would remove the $35,000 lifetime limit on rolling unused 529 plan money into a Roth IRA for the account’s beneficiary. Every other rollover rule created by the SECURE 2.0 Act would stay in place, including the annual cap tied to Roth IRA contribution limits.
The bill applies the change to distributions made in taxable years beginning after the date of enactment. If the law is signed in 2026, the first allowed rollovers past $35,000 could happen in 2027. That timing matters for families weighing what to do with a 529 when a child skips college or finishes school with money left over.
In the announcement, Cruz said, “The law currently penalizes families when their children receive a scholarship or choose an alternative to college, leaving education savings unused.”
It’s important for families to realize that just because this is federal law does not mean that all states conform with the rules. For example, California currently treats the 529 plan to Roth IRA conversion as a non-qualifying distribution. That means California families who do this would face state taxes and a state tax penalty.
Here’s what to know about this bill.
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Why It Matters
529 plans were originally intended as education savings vehicles. However, over the last several years, the definition of qualified expenses has expanded. This has given families more opportunity to avoid any future 529 plan penalties for unused funds.
The Roth rollover is a tax-free exit for leftover money, but the $35,000 cap limits how much can leave that way per beneficiary.
529 plans held $568 billion across 17.3 million accounts in mid-2025, an average of roughly $32,900 per account, according to the latest 529 plan statistics. That average balance is right under the current rollover cap.
The families most affected by removing the limit are those who saved well above average in a 529 plan and those whose child earned a full scholarship.
In nearly 20 years of writing about college savings, I’ve found that worry over leftover money is one of the biggest reasons families never start saving in a 529 plan. Parents want to know what happens if their child doesn’t use the money for college, and whether they’ll owe a penalty to get it back. An uncapped Roth rollover would give those families a clearer answer: money a child doesn’t spend on school could become that child’s retirement savings instead.
What Would Change And What Wouldn’t
The proposed bill removes the lifetime cap and nothing else. Every eligibility test from SECURE 2.0 still applies, which keeps the rollover a slow, multiyear process for anyone with a large balance. Before planning around the bill, families should know how the current 529-to-Roth rollover rules work, because each of these stays the same:
- The 529 account must have been maintained for the beneficiary for at least 15 years.
- Contributions made in the five years before the rollover, plus their earnings, can’t be moved.
- Each year’s rollover counts against the beneficiary’s Roth IRA limit, which the IRS set at $7,500 for 2026, reduced by any other traditional or Roth IRA contributions that year.
- Earned income is still required: the beneficiary generally needs wages or self-employment income for the rollover year.
- Roth IRA income limits still wouldn’t apply to these rollovers.
| Rule | Current Law | Under S. 5550 |
|---|---|---|
| Lifetime Rollover Cap | $35,000 per beneficiary | No cap |
| Annual Rollover Limit | Roth IRA limit ($7,500 in 2026), minus other IRA contributions | Unchanged |
| Account Age | Open at least 15 years | Unchanged |
| Recent Contributions | Last 5 years of contributions and earnings excluded | Unchanged |
| Earned Income | Beneficiary generally needs earned income | Unchanged |
| Roth Income Limits | Don’t apply | Unchanged |
| Effective Date | Rollovers allowed since 2024 | Tax years starting after enactment |
How Long Would A Large Rollover Take?
Without a lifetime cap, the annual Roth limit becomes the only issue. Moving a large balance into a Roth IRA account would take a decade or more.
At the 2026 limit of $7,500, rolling over $35,000 takes five years (four years at $7,500 plus $5,000). A $60,000 balance would take eight years, and a $100,000 balance would take 14 years. The IRS adjusts the IRA limit for inflation, so later years could allow more, and money still sitting in the 529 keeps growing too.
Also important to realize that the rollover also uses up the beneficiary’s own contribution limits. A 24-year-old receiving a $7,500 rollover in 2026 can’t add a dollar more to their own Roth IRA that year. For a young worker who wouldn’t otherwise max out a Roth, that’s a gift of tax-free growth. For one who already contributes the full amount, perhaps after opening an investment account as a teen, the rollover replaces savings rather than adding to them.
Vanguard also notes that changing the 529 beneficiary may restart the 15-year clock pending IRS guidance. A family planning to change the 529 beneficiary to a sibling and then roll the money over should confirm the account’s eligibility first, since the bill doesn’t address that question.
Which Families Would Benefit Most?
Families with more than $35,000 left in a 529 after a child’s education would gain the most from the proposal. A student who earns a full scholarship, attends a U.S. military academy, or picks a trade program that costs less than the account balance can end up with a surplus no tuition bill will absorb.
Under current law, the scholarship exception to the 529 withdrawal penalty waives the 10% additional tax on withdrawals up to the scholarship amount, but the earnings are still taxed as income.
The bill would let that surplus keep growing tax-free in a Roth IRA instead, one year at a time. Families with balances below $35,000 gain nothing new, since current law already lets them move the full amount if the account meets the 15-year and earned income rollover tests.
And again to re-emphasize, not all states conform with these rules. Please check your state’s rules before you do this rollover so you don’t run into any unexpected tax bills.
How This Connects
State tax treatment of 529 plan to Roth IRA rollover rules vary.
Not every state treats a 529-to-Roth rollover as a qualified distribution, and a nonconforming state may tax the rollover or recapture prior state deductions. Check your state’s 529 plan rules before moving money, even if S. 5550 becomes law.
The bill also fits a broader pattern: Congress has steadily expanded 529 flexibility, from student loan repayment and apprenticeships to the higher education and financial aid changes in the OBBBA.
What’s Next
The proposal would need to clear the Senate Finance Committee, which writes tax law and drafted the original SECURE 2.0 rollover provision. Neither Cruz nor Blunt Rochester sits on that committee.
Signals to watch include a Finance Committee cosponsor, a House companion bill, or the language riding along in a larger tax or retirement package. Until any of that happens, the $35,000 cap stays in effect, and families opening a 529 plan now start the 15-year clock on the day the account opens.
Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.