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Kick-Start Your Child’s Retirement Savings by Rolling Over Unused NYS 529 Plan Assets

With college costs increasing at a rate greater than inflation, investing within a 529 plan offers participants the opportunity to keep up with rising education expenses with some immediate tax savings upon funding. Since there are many unknown factors as to how much your child’s future education expenses will cost, it can be difficult to pinpoint exactly how much to save. As a result, some of these plans are overfunded and subject to tax penalties if withdrawn for non-qualified education expenses.

New York State has recently adopted the Federal Secure 2.0 Act ruling that allows unused 529 plan balances up to $35,000/beneficiary to be rolled into a Roth IRA for the original beneficiary. This transfer will be income tax and penalty free if participants meet the following requirements:

  • The 529 account must have been open for 15 years prior to the conversion.
  • The amount being rolled over must have been in the 529 account for at least 5 years prior to being rolled over.
  • The amount being rolled over cannot exceed the annual Roth IRA contribution limit each year ($7,000 for 2025).
  • The 529 plan beneficiary must also be the owner of the Roth IRA and have earned income at least equal to the amount being rolled over each year.

The chart below shows the result of rolling over $35,000 of unused funds assuming a 6% annual rate of return over the course of 40 years. This projection assumes the $35,000 will be rolled over in $7,000/year increments for the first five years with no additional subsequent contributions.

As you can see, rolling over your child’s unused NYS 529 plan funds can provide them with a substantial head start on their retirement savings. It is worth noting that any unused funds above the $35,000 limit will be subject to the following penalties upon distribution:

  1. The portion of nonqualified distributions attributable to earnings will be subject to federal income tax and a 10% penalty.
  2. The individual who originally contributed to the NYS 529 plan will have to recapture any previously deducted contributions attributable to the non-qualified distributions on their NYS tax return.
  3. The beneficiary will have to pay tax on the earnings portion of the distribution at their NYS ordinary income tax rate.

Overall, this strategy provides a unique opportunity for individuals to rollover a portion, or all, of their overfunded 529 plan balances invested to a tax-advantaged Roth IRA without facing penalties. New York State has authorized participants to implement this strategy, however the tax treatment will vary depending on which state you live in. We suggest contacting your Rockbridge financial advisor if you are interested in learning more about how these rules may apply to your situation.

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Rockbridge Institutional – March 2025 Market Review

Market Review

Here are the recent returns from various market indices:

Stocks

Note that this quarter it’s international markets that are up, it’s domestic markets, especially the larger tech stocks, that are down – not what we’ve been used to. The S&P 500 was down 4% and the Russell 2000 down 9%, International developed markets (EAFE) and Emerging Markets (MSCI Index), on the other hand, were up 4% and 3%, respectively, demonstrating the benefits of diversification.

An equally weighted portfolio of the so-called “Magnificent Seven” (Apple, Amazon, Google, Meta, Microsoft, Meta and Tesla) portfolio lost 16% of its value this quarter. Tesla lost 35%. These results explain much of the falloff in the S&P 500.

The Russell 2000 Small Cap index, because it includes a diverse group of companies across the domestic economy, is often considered a leading indicator of economic activity. The sell-off in this market is consistent with expectations of a recession in the immediate future.

Value stocks held up better this quarter. In domestic markets, the S&P 500 Value Index is about flat, the Russell 2000 Value Index is down, less than the market-wide index. The same story in international markets – the EAFE Value Index is up significantly more than the comparable growth index. However, take care not to extrapolate one quarter’s results into the future, but acknowledge it helps to solidify the importance of remaining committed to global stock markets.

References to the “stock market” in the popular press oftentimes means the narrowly defined Dow Jones Industrial Average or the S&P 500. We see this quarterly, especially that the stock market includes several markets that can behave differently from one another.

Bonds

Allocations to bond markets were a net contribution this quarter reflecting a downward shift in the Yield Curves as shown in the accompanying chart. Our index of US Treasury securities was up 1.4% at the short end (1-3-year) and 3.6% at the long end (7-10 year).

Nominal yields on Treasury securities, which do not include the risk of default, are driven by interest rates and expected inflation.  Recent declines are attributed to declining interest rates as the spread between real and inflation-adjusted yields have remained constant. Consequently, these changes in bond yields are consistent with a slowdown ahead.

Uncertainties

Markets are dealing with a myriad of uncertainties, primarily from on and off again tariffs. Further contributing to uncertainties are recession concerns, the Fed’s monetary policy and interest rates. Markets don’t like uncertainty.

The so-called VIX index measures stock market volatility.  It is calculated daily by looking at the implied standard deviation in option prices of 30 large cap stocks. This VIX index has doubled since the beginning of the year.  These numbers confirm today’s volatile stock market.

The ups and downs of tariff policy are clearly what’s driving today’s market volatility. Tariffs impact not only the global economy, but also the political landscape. A given tariff regime will be reflected in stock prices. It’s unanticipated changes in tariff regimes that translate into volatility. Consequently, expect continued market instability.

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