529 Plans: What to Do with Leftover Funds?

Ken Weingarten |
Categories
Education
529 Plans

For any parent wanting their child to go to college, 529 plans are a staple when saving for this goal. The benefits of tax-deferred growth and tax-free withdrawals, if used for qualified educational expenses, make this option very attractive. However, in the realm of possibilities, there exist scenarios in which this account’s funds will not be used. Here we discuss what they are and possible solutions.

Some of the more common scenarios faced are:

  • What if the child does not go to college?
  • What if the child gets a scholarship?
  • What if the child finished college and there are still funds leftover?

These scenarios in question all point to the same issue: What to do with the unused 529 balance?

One should keep in mind that 529 plans are not a “Use it or lose it” type of account. Any contributions made with after-tax dollars can be withdrawn without paying taxes or penalties. On the other hand, if a non-qualified distribution is made, ordinary income taxes AND a 10% penalty will be owed on the earnings portion.

Having an unused 529 balance does not mean it has to be liquidated because it was not used for its intended purpose. Here are a couple of options to consider in order to avoid paying taxes & penalties and thus keeping more of your savings in place:

  • 529 plans are not limited to undergraduate expenses. If the child decides to go to graduate school later in life, unused 529 plan funds can be used to cover this as a qualified educational expense.
  • Change the 529 plan beneficiary to a sibling or other qualifying family member who is likely to use this for college expenses.
  • Make yourself the 529 plan beneficiary and use the funds if you decide to go back to school for continuing education.
  • If a future grandchild is expected somewhere down the line, the 529 plan beneficiary can be changed for the benefit of the grandchild. 529 plans do not have a time limit and as such, they can be left to grow for long periods of time.

While an unused 529 is a good problem, saving into it is still worthwhile. 529 plans are very versatile and with ever-increasing education expenses, getting an early start on saving will help tremendously in the long run.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.