Key Takeaways
- A 20-year-old caller to The Ramsey Show has $70,000 in a 529 her grandmother opened when she was born, and she planned to cash it out for a rental property despite the tax and penalty.
- Her account has been open more than 15 years, so up to $35,000 of it can move straight into her own Roth IRA, with no more in a year than the IRA limit of $7,500 in 2026.
- The rollover shares the yearly limit with her own Roth contributions, so it works as a swap that frees up her own pay for other goals.
- Grandparents with an over-funded 529 should check two dates: the account must have been open more than 15 years, and money added in the last five years can’t roll.
If you’re a grandparent with more in a 529 than your grandchild will ever spend on school, I have some good news. Since the start of 2024, up to $35,000 of that leftover can move straight into the grandchild’s own Roth IRA, without the tax and penalty a withdrawal would cost.
And a caller to The Ramsey Show this week showed just how handy that can be.
A $70,000 college fund she doesn’t need
The caller, a 20-year-old college student in Los Angeles, told the show on Nov. 9 that she nannies and already saves hard: “I max out my Roth every year. I invest about $2,000 a month just from my income.” Grants are covering her school, so she hasn’t touched the 529 her grandmother opened for her in California’s ScholarShare plan when she was born. It now holds $70,000.
Her plan was to cash it out for a down payment on an out-of-state triplex. She figured she’d keep about $60,000 after taxes and the penalty, so getting at her own money would cost her about $10,000.
When she said she was open to other ideas, Jade Warshaw offered one: “Why not roll it over to a Roth IRA over time? Once you’ve hit the 15 year account rule, because you can roll up to 35 grand over time.”
6 safe dividend stocks paying retirees 6%+ yields
There are over 100 stocks paying 6%+ annual dividends today.
But after an extensive investment review leveraging TIKR’s proprietary data, we now believe only six of them are truly safe for retirees.
They’re all yours for free as part of our new investment report, which you can access right here.
Grandma opened it early enough
A 529-to-Roth rollover has to go by direct trustee-to-trustee transfer into a Roth IRA in the beneficiary’s own name, from a 529 that’s been open more than 15 years. Each year’s rollover can’t top the Roth IRA contribution limit, $7,500 in 2026, and all of a person’s rollovers together can’t top $35,000 over their lifetime. Money contributed to the 529 in the five years before a rollover, along with its earnings, has to stay behind. And the beneficiary needs at least as much earned income that year as the amount rolled over.
This caller’s account has been open for 20 years, so it clears the 15-year test easily, and her nanny pay covers the earned income. As long as at least $35,000 of the balance is money her grandmother put in more than five years ago, plus what it has earned, she can move the full amount.
Five years to move $35,000
Split down the middle, that’s $35,000 for her Roth over time and $35,000 left in the 529. At 2026’s $7,500 limit, the Roth half takes four full years of $7,500, or $30,000, plus $5,000 in a fifth year.
But the rollover counts against the same yearly limit as her own Roth contributions: anything she puts in for a year comes off what the 529 can send that year. Since she already maxes her Roth from her pay, the 529 money would take the place of her own contributions.
And for her, that swap is a great deal. Once the 529 fills her Roth each year, the $7,500 she’d have put in from nannying is free for anything, the triplex down payment included. Over five years, that’s $35,000 of her own pay for the down payment, with no penalty on any of it, while her Roth ends up just as full as if she’d kept funding it herself.
Grandparents, check the dates first
Grandparents who opened a 529 at birth clear the 15-year test before the grandchild finishes high school. Money you add now is another matter: it can’t roll for five years, and neither can what it earns, so topping up an account for a grandchild who’s nearly done with school ties that money up. The $35,000 cap covers the grandchild’s whole lifetime, across every 529 they’re the beneficiary of, so a grandchild with 529s from both sides of the family can still roll only $35,000 in all. And a grandchild without a job yet has to wait for one, since the rollover needs earned income in the year it happens.
Jade’s route beats the triplex
Frankly, I’d roll the $35,000 and skip the cash-out. She’s 20, so that money gets decades to grow in a Roth, and the paycheck money it frees up gets her to a down payment without handing over a penalty first. The other $35,000 can stay in the 529 while she decides what to do with it. If she’s already maxed her Roth for 2026, there’s no room left for a rollover this year, so the first one would come in 2027, and a higher IRA limit then would get her to $35,000 sooner.
Enjoy your retirement in style with these safe 6%+ dividend yields
Dividends can hold the key to enormous wealth. But only if you buy the right ones.
Picking the right high-yield dividend stock can be the difference between a dream retirement…and scraping by every month, waiting for the next Social Security check to clear.
We’ve identified six stocks yielding 6%+ that we believe every retiree should know about right now.
Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
