For doctors, investing in 529 accounts has always held some nice advantages. But, with the SECURE 2.0 Act, investing in 529 accounts got even better. Like a lot better.
So let's dig in.
Because I know a lot of investors and doctors who continue to be hesitant to utilize these accounts to their full potential.
But let's start with a review.
• I’ve found I can use my medical expertise to earn money in less than 10 minutes.
• During downtime, I knock out quick surveys and get paid for it.
• The money shows up right away in PayPal or gift cards.
• It’s by far the easiest side income I’ve come across and one I actually use.
Investing in 529 accounts
A 529 account is an education savings account. You can contribute money somewhat tax free (contributions are taxed at the federal level but are pre-tax on the state side – assuming you live in a state that provides tax deductions for these contributions), invest it tax free, and withdraw it tax free so long as it goes towards your designated child’s education.
529 accounts don't have contribution limits per se. But if you contribute more than $19,000 annually per child if you are single of $38,000 if married (in 2026) then you start to lose tax benefits as it is considered a gift by the IRS above that amount.
However, you also have the option of front loading a 529 account with up to 5 years of maximum contributions as a one time sum. So, in 2026, you could contribute $95,000 (if single) up front for each child (and not be able to contribute again for at least 5 years) rather than spread it out over 5 years.
What's more?
Each state has its own 529 plan. And some are better than others. But you don't necessarily need to invest in the 529 account of the state that you live in. You can invest anywhere.
However, most states will have some state tax deduction for contributions to their in-state 529 plan.
So, if you are considering contributing to a 529 (and more on why you should later), check out your state plan (you can find all state plans here). If it is better or similar to other states and your state offers a tax deduction, it probably makes sense to use your in-state 529. If your state has a really bad plan and no deduction, it's an easy decision to use a better state's plan. And lastly if your state has a deduction but a crappy 529 plan, weigh the benefit of the deduction against the lower fees and better investing options in another state's plan.
So, let's quickly lay out the main benefits of investing in 529 accounts before SECURE 2.0…
- Pre tax contributions in most states (which lower your taxable income)
- Tax free growth
- Tax free withdrawals if used towards child's eduction
- Possible state tax deduction
- Freedom to choose among all state plans (however may lose in-state tax deduction)
All in all, that is pretty sweet!
That's why Selenid and I contribute monthly to 529 accounts for all 3 of our children as called for in our written financial plan. And true, we do not maximize these accounts for our kids because we plan to pay for their college using a combination of these 5 methods.
But investing in their 529 accounts plays a big role in that plan.
But then the SECURE 2.0 Act was passed in December 2022
And things got even better after these changes went into effect in January 2024.
What changed for 529 accounts with SECURE 2.0
The SECURE 2.0 Act was a big one. With lots of changes. But one of the ones that tends to get glossed over a bit relates to 529 accounts.
Starting in 2024, qualified “leftover” 529 account funds may be transferred to a Roth IRA free of any tax, penalty or applicable income limits. Yeah! I know!
But what does this mean?
Well, one of the biggest concerns that people have with investing in 529 accounts is if they will have money leftover. Because, while you can re-assign excess funds to another child, any withdrawals not put towards a child's education gets taxed and penalized 10%. Which is a big bummer.
So, people worry about their kids not going to college. Or not have enough education related expenses. Or getting a full ride. Maybe even getting financial aid (not super likely for high income physician families).
And, in these cases, what happens to the extra money in the 529. Wouldn't it have just been better to invest it elsewhere? Somewhere it won't fact both taxes and a big penalty? Even a taxable account is better in that sense.
Now, I'm not going to argue about the logic of that thought process. Because I think it is flawed. Education expenses are rising astronomically and look likely to continue doing so. And, if you are saving for your own retirement before contributing to your kids ‘s 529 account like you should be (remember, your kids can get a loan for school. But there are no loans for retirement), then this is rarely an issue.
But, either way, this new provision solves this problem!
Now, if you have up to $35,000 left over in a 529 account, you can just transfer it tax free to a Roth IRA (more on Roth IRAs here), where your kids can withdraw it tax free after age 65. That's awesome!
Keep in mind though that the annual rollover limit is subject to Roth IRA annual contribution limits ($7,500 for 2026; $8,600 for individuals age 50 and older). And as mentioned above, there is a lifetime rollover limit of $35,000 for each 529 account beneficiary.
I've heard some rumblings from individuals who would rather just give this money to their kids without the caveat of them needing to wait until age 65 to access it. But giving your kids a head start on their path to financial freedom is about the best gift you could give them if you ask me. And of course, if that still bothers you, you can always just change the beneficiary of the 529 to a grandchild, same as always. But I'd rather have the Roth IRA.
• I’ve found I can use my medical expertise to earn money in less than 10 minutes.
• During downtime, I knock out quick surveys and get paid for it.
• The money shows up right away in PayPal or gift cards.
• It’s by far the easiest side income I’ve come across and one I actually use.
Should this change your financial plan?
Well, maybe.
Here are the 2 ways that these alterations may impact your investing in 529 accounts:
- If you have kids, it makes investing in a 529 account basically a no-brainer after you have sufficiently invested for yourself and are set to achieve your goal retirement next egg like you can calculate here. While beforehand, other options maybe seemed more attractive, 529 accounts with the ability to transfer excess to a Roth IRA in their name cover all of your bases: tax-deferred contributions, tax free growth, and tax free withdrawal potential. So, investing in 529 accounts likely moves up a step or so in your investment waterfall.
- If you don't have kids (now or ever), investing in a 529 account can still make sense. You could invest in a 529 under your own name. And then, when you have a kid or kids, you can transfer it to their name(s). Or, if you never have kids, you can just transfer up to $35,000 to a Roth IRA in your name. (In this case, it makes sense to limit your contributions to $35,000 before you have kids in case.) That's a new nifty version of a backdoor Roth IRA.
And there you have it
Investing in 529 accounts just got better. I have always argued that doctors should contribute to these accounts despite the minor potential drawbacks.
But now, there really is no excuse. These advantages are just too good to pass up!
And once you do this, check out these other helpful and fun investing posts!
- My 7 New Financial Plan Changes
- Debunking 7 Financial Myths Overheard in the Doctors' Lounge
- Maximizing Tax Deductions as a Physician
What do you think? Do you invest in a 529 account yet? Do these changes impact your plans to do so? Why or why not? Let me know in the comments below!
• I’ve found I can use my medical expertise to earn money in less than 10 minutes.
• During downtime, I knock out quick surveys and get paid for it.
• The money shows up right away in PayPal or gift cards.
• It’s by far the easiest side income I’ve come across and one I actually use.
13 Responses
I’m pretty sure 529 contributions are only post tax money. You don’t get a deduction on the federal side although some states do give you a deduction. Also confused about this Roth rollover because how I understand it you can only roll it over to the same beneficiary. So any unused funds can be rolled over to a Roth of the beneficiary named on the 529. You can’t just roll over left over finds from your kids 529 to your Roth.
You are right! Most states will have a tax deduction for contributions. But if yours doesn’t then it is not a tax deferred investment. And you can transfer to a Roth in your kid(s) names. Unless you start to invest in a 529 in your name before you have kids and then never end up having kids.
For mining 529 funds to Roth IRA, I believe the annual contribution limit still applies (So moving 35,000 would take a few years, but by the time I’m 65, hopefully the annual limits are much higher). So the combination of money moved from a 529 to an IRA and other direct IRA contributions cannot exceed the annual maximum. (correct me if I’m wrong)
Correct!
You should tale out the bullet point that says “ Pre tax contributions in most states (which lower your taxable income)”
And just leave this part
“ Possible state tax deduction”
As that is far more accurate
Hi Jordan,
Thanks for the article on the 529 transfers to a Roth IRA account. There are a few additional caveats you may want to forewarn people about: The beneficiary must have earned income at least equal to the rollover amount in the contribution year. The account must have existed for ≥15 years in the name of the beneficiary before any rollover. Contributions are made with after-tax dollars, although some states allow you to deduct a portion of the contribution. Funds contributed in the previous 5 years cannot be rolled over, including earnings. The rollover must go to a Roth IRA owned by the 529 beneficiary, not the parent or account owner. Finally, Roth IRA income limits do NOT apply (I.e., no phase outs). I started contributing for both myself and my daughter this year.
Excellent clarifications, thank you!
I have been saving in a 529 for my 3 children for over 18 years( since they were born). I also have saved enough for myself now that I am retired.
They are all finished with college and I have $200,000 leftover in a 529 that I placed in an account which is designed for maximum growth for 18 years. I have a clause in my will that my grandchildren ( all currently under 3 ) to have these funds for their college educations (divided by how many grandchildren I will have).
What would be the point of converting to a Roth IRA? . Then my grandchildren would not be able to use the funds till they are 65.
In 18 years the current 529 could be well over 1 million and hopefully enought to pay for their colleges
Absolutely a valid use for it for the grandkids! The Roth just gives your kids a bit more flexibility for how they could use it, including for the grandkids. No wrong answer!
Check out Kitces’ article on Dynasty 529 plans that in GORY detail outlines how to set things up, including generation-skipping rules.
Roth fund contributions can be taken out 5 years after the conversions. Gains face a penalty if taken out before 59.5.
I opened 529s for my two grandchildren. My grandson just finished welding school and I just rolled over his 529 to a Roth. One advantage you didn’t mention is the teaching experience. I sat down with my grandson and showed him a web site that projects the future retirement amount based on compounded interest. It really helped him understand the value of time and how much the pot accelerates by adding a little each month, and how one can never replace time if he drained the account prematurely. Seeing the graph and letting him play with the variables really sunk in. I also showed him how mortgages work in “reverse”, and how most payment goes to interest in the beginning, and why 15 year mortgages have an advantage to building equity in your home.
Love this! More kids need exposure to this and education from their family!