Cruz Introduces Bipartisan Bill to Expand 529 Savings Flexibility

A bipartisan Senate proposal would allow families to transfer more unused education savings into retirement accounts by eliminating the $35,000 lifetime limit on rollovers from 529 plans to Roth IRAs.

Sen. Ted Cruz (R-TX) and Sen. Lisa Blunt Rochester (D-DE) introduced S. 5550, the "529 Retirement Enhancement Act of 2026," to give families more options when money saved for education is no longer needed for that purpose. The legislation would remove the lifetime rollover cap while retaining existing safeguards governing transfers.

The proposal addresses a common concern among parents who save for their children's education. College expenses are difficult to predict, and families can end up with unused savings when a student receives a scholarship, chooses a less expensive school, or pursues a different career path.

Current Rules Limit What Families Can Do With Unused Savings

529 plans allow families to invest after-tax income for education expenses. Investment earnings grow tax-free, and withdrawals are tax-free when used for qualified education costs.

The tax advantages come with restrictions. Families that withdraw earnings for nonqualified expenses generally owe income taxes and a 10% penalty, although certain exceptions apply.

Congress provided some relief through the SECURE 2.0 Act of 2022, which allowed unused 529 funds to be transferred into a beneficiary's Roth IRA beginning in 2024. The law established a $35,000 lifetime rollover limit, meaning families with larger unused balances could still face taxes and penalties if they needed to withdraw the remaining earnings for other purposes.

The existing rules also require the 529 account to have been open for at least 15 years. Contributions made within the previous five years, along with their earnings, cannot be rolled over. Transfers are subject to annual Roth IRA contribution limits and earned-income requirements.

Legislation Would Remove the Lifetime Rollover Cap

The Cruz-Blunt Rochester legislation would eliminate the $35,000 lifetime limit while maintaining the other restrictions on transfers.

Tax policy analysts Adam Michel and Santiago Forster explain that a beneficiary with $60,000 remaining in a 529 account could eventually transfer the full balance into a Roth IRA instead of being limited to $35,000. The transfers would still need to occur over multiple years because annual contribution limits would remain in place.

The legislation would provide a practical alternative for families that saved more than their children ultimately needed for education. Rather than withdrawing the remaining funds and potentially paying additional taxes, beneficiaries could redirect those savings toward retirement.

This could be particularly helpful for young adults who are beginning their careers and have limited retirement savings. Money accumulated in a 529 account could continue growing in a Roth IRA, subject to the account's rules, instead of being withdrawn simply because education expenses were lower than expected.

More Flexibility Could Encourage Families to Save

Uncertainty about future education expenses can discourage families from opening 529 accounts.

Michel and Forster cite research showing that 26% of parents without a 529 account are concerned that their savings could go unused if their child does not attend college. Removing the lifetime rollover limit would help address that concern by giving families another way to use money originally set aside for education.

The proposal also reflects a broader problem with federal savings policy. Congress has created different tax-advantaged accounts for education, retirement, health care, and other expenses, but the rules governing those accounts often restrict how Americans can use their savings when their needs change.

Universal Savings Accounts would offer a more flexible alternative by allowing Americans to save and invest without limiting withdrawals to specific government-approved expenses. Such accounts could complement existing savings programs while reducing the complexity that discourages participation.

The proposed 529 reform is narrower, but it would make an existing savings program more useful without establishing a new federal benefit.

CFE Takeaway

Federal tax policy should encourage Americans to save without imposing unnecessary restrictions on how those savings can be used. Families should not face additional tax consequences simply because their children need less money for education than originally anticipated.

Removing the $35,000 lifetime limit on 529-to-Roth IRA rollovers would give families greater flexibility while preserving the tax advantages of long-term saving. Congress should build on this approach by simplifying savings rules and expanding opportunities for Americans to accumulate wealth and prepare for their financial futures.