Adam N. Michel and Santiago Forster
The system of private saving and investment in the United States spans more than a dozen special-purpose accounts, which breed complexity and discourage use. A new bill introduced by Senators Ted Cruz (R‑TX) and Lisa Blunt Rochester (D‑DE) gives families expanded flexibility to use their own savings with fewer government restrictions. The 529 Retirement Enhancement Act (S. 5550) would repeal the $35,000 lifetime cap on 529-to-Roth IRA rollovers.
This simple change would let families roll more unused education savings into their child’s Roth IRA over time, instead of leaving the money stranded in a 529 plan when a child earns a scholarship or chooses an alternative to college. It also removes one reason families hesitate to use a 529 plan in the first place.
Too Many Rules Discourage Saving
A 529 plan with limited rollovers illustrates two problems with special-purpose accounts. Savers may underfund the account because they worry that their life goals might change, while those who do save can face penalties when their circumstances change.
A 529 plan lets families save after-tax dollars for education. Earnings grow tax-free and can be withdrawn without additional tax for qualified expenses like tuition, books, and room and board. Earnings withdrawn for non-qualified uses are subject to the income tax plus a 10 percent penalty.
Because the money, once deposited, is earmarked for one purpose, it is common for savers to choose to forgo the tax benefit out of fear of having to pay the withdrawal penalties. Among parents without a 529 plan for their kids, 26 percent fear that the dedicated savings will go to waste if their child decides not to attend college. Younger savers face the same problem when saving for retirement. Because the money is less accessible, they may instead save for near-term goals, such as a car or a house, ultimately sacrificing the tax benefits of a retirement account.
Families who save diligently face the opposite problem. Consider an only child who attended an in-state college while living at home. Her 529 plan was opened at birth; her grandparents contributed $200 to the account each month, and after graduation, she had $60,000 in unused funds. Without the ability to roll over the funds to a different account, the earnings would be taxed as ordinary income rather than at capital gains rates and would be subject to a 10 percent penalty.
The SECURE 2.0 Act of 2022 created a narrow exception for children in this predicament, allowing up to $35,000 in unused funds to be rolled over into a Roth IRA.
The earnings on the remaining $25,000 in the example above are still taxed as ordinary income, plus the penalty. That creates an incentive to spend it or lose some of it to higher taxes. Rather than pay the penalty, families have reason to spend leftover funds on a pricier school, a graduate degree, on-campus housing, or other qualified expenses they would otherwise skip.
The Reform Adds Flexibility
The Cruz-Blunt Rochester bill would remove the $35,000 cap on 529 plan rollovers. That flexibility would help both families who are reticent to save for fear of earmarking funds and those who have saved too much. It also removes the pressure to spend leftover savings on more education than a student needs.
With no rollover cap, the college graduate could roll over her entire $60,000 in leftover funds into a Roth IRA at $7,500 a year (the 2026 IRA contribution limit) while she works. Families who hesitate to save in qualified accounts would also benefit. Knowing that any unused funds can be used for retirement savings without penalties, they would have a much greater incentive to contribute more to a 529 plan.
The bill leaves the law’s other guardrails in place. The 529 plan must have been open for at least 15 years before any of the funds can be rolled over. Contributions made in the last five years, plus the earnings on them, cannot be rolled over, and rollovers count against, and can’t exceed, the Roth IRA annual contribution limit. The beneficiary must also have earned income, and the money can go only into the beneficiary’s own Roth IRA.
The 529 with Roth rollovers is already among the best investment vehicles available for children. Improving it further without creating a new account or subsidy would be a tangible step in the right direction.
A Step Toward Universal Savings Accounts
Removing the cap on 529 plan rollovers is a significant step toward giving families the flexibility and certainty they need to maximize their savings. Leftover education savings would become the beneficiary’s own retirement savings instead of triggering a new tax bill.
This additional flexibility is a step toward the type of unrestricted investment that could be made available through a Universal Savings Account (USA). Instead of choosing among a dozen options, families could save in a single account, be taxed only once, and withdraw their money at any time and for any reason, without penalties. For savers wary of locking their money behind non-qualified withdrawal penalties, a USA could serve as an on-ramp to the rest of the savings system.
Canada’s Tax-Free Savings Accounts (TFSAs) provide a useful case study. Introduced in 2009, they allow after-tax contributions, tax-free growth, and unrestricted withdrawals. In 2023, 62 percent of Canadian tax filers held one, up from 42 percent in 2013. Individual Savings Accounts (ISAs) in the United Kingdom have enjoyed similar success in encouraging saving through additional flexibility.
Senator Cruz also sponsors the USA Act of 2025 (S. 1581), which would allow Americans to access the types of universal accounts enjoyed in Canada and the UK.
The 529 Retirement Enhancement Act is a good bipartisan proof of concept for universal savings accounts. Given more flexibility and control over their own savings, Americans will save more.
