It could be that your children have all graduated college or maybe they’ve decided not to go. Either way you ended up with money left over in a 529 college savings plan account. Now what?
What can I do with leftover 529 money? You can leave leftover 529 plan funds in the account to help with qualified expenses in graduate school for the original beneficiary or certifications for another qualifying family member (or yourself). You can also use the 529 plan savings for your own schooling, transfer it to another member of the family, put it towards student loan repayment, or withdraw it.
If you are reading this, you probably already know what a 529 is. But in case you don’t, let me fill you in.
According to the Securities and Exchange Commission (SEC), “A 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.”
The SEC also says, “There are two types of 529 plans: prepaid tuition plans and education savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a prepaid tuition plan.”
There are tax consequences to making a plan distribution if the money won’t be used for qualified education expenses. The question I’ll answer today has to do with what happens to money that is left over in the account after the intended beneficiary has graduated or has decided not to get a college education.
What are the options for using that money without incurring a tax penalty?
Read about the 70 20 10 Rule of saving money.
What Happens If You Don’t Use 529 Money?
After all of the sacrifices and saving you dealt with, you now have a 529 account with money left in it. Unfortunately, that leftover money can only be used for education purposes.
Unless of course you are willing to pay the taxes and penalty on the earnings. (There is a section below about the Penalty For Leftover 529 Funds. It provides options on what to do with the money).
As I mentioned above, if you think graduate school is a possibility for the original beneficiary or that job certifications will be needed in the future, then leftover 529 money can help offset those expenses.
Changing the plan beneficiary to other eligible family members can also be a great way to use the leftover funds. The new beneficiary can be a sibling, nephews, nieces, grandchildren, and grandparents (but not a first cousin).
You can even make yourself the beneficiary and take classes you are interested in.
Keep reading to get the answers to a few more 529 questions. I’ll touch on things like whether you can leave money in a 529 forever and go more in-depth about your options for what to do if you have excess funds.
I’ll also talk about how much you can withdraw, possible penalties, some withdrawal strategies, and some additional frequently asked questions.
Learn what happens to a 529 when a child turns 18.
Can You Leave Money In A 529 Forever?
Forever is such a long time. And a 529 can be open for a very long time.
For example, suppose Robin opens a 529 account for her daughter, Pat. Pat gets her undergraduate degree at age 22, but there is still money left in the account because Pat had managed to get a college scholarship that covered a lot of the qualified educational expenses the 529 plan money was meant to cover. If Robin does not touch the account, the money will continue to grow.
Once Pat has children who are ready to go off to college, Robin can change the beneficiary from Pat to one of her future grandchildren.
In some circumstances, Robin could eventually also change control of the account (ownership) to the grandchild. This new owner of the account can then specify a new beneficiary, such as their child or grandchild.
Using this method, the 529 could be open forever, in theory, as long as there was money available.
How Much Can You Withdraw From A 529 Per Year?
Well, you could withdraw everything from a 529 in one year. But you may not want to.
There are two types of withdrawals, qualified and non-qualified.
Qualified withdrawals are for things your 529 plan allows as college expenses. There are no taxes or fees involved in withdrawing money that you use for this purpose.
A non-qualified withdrawal refers to money taken out for something that is not considered an allowed college expense. This is a “non-qualified distribution” and will require you to pay taxes and a penalty on any earnings.
So, the question you should ask is how much money can you withdraw per tax year without paying taxes or penalties? The answer could still be everything in the account, as long as it is paying for approved college expenses.
In other words, there is no withdrawal limit. However, it is up to you to be aware of what is approved and what is not approved as a college expense.
Penalty For Leftover 529 Funds
This can also fall under the What Happens If You Don’t Use 529 Money section above.
There is no penalty for money that is left over in a 529 fund. Any penalty that may happen is triggered by what you do with that left over money.
If you leave the money in the account, there is no penalty and it will continue to grow. If the beneficiary comes back 10 or 20 years later for graduate school, certification classes, or even a class in basket weaving, there is no penalty.
If the beneficiary is changed to a sibling or other family member and used for college, there is no penalty. And remember, a family member could also be a niece, nephew, cousin, grandparent, or even you.
If the money is used for non-qualifying college expenses, though – wham -there is a penalty. You will have to pay taxes and a 10% penalty fee on the earnings portion of the withdrawal.
If you use the money for qualified higher education expenses, but not for the listed beneficiary – wham – you owe taxes and a penalty.
You could even use the money for a normally qualifying expense with the correct beneficiary and still get hit with taxes and a penalty. This is because not all schools qualify for 529 use. While tuition is normally a qualifying expense, it is non-qualifying if used at a non-qualifying institution, such as Billy Jim Bob’s School of Aardvark Painting.
The point is, make sure you understand what you can, and cannot, use the money for if you want to avoid taxes and penalties. To be on the safe side, you probably should consult a tax advisor or financial advisor to be certain before making the withdrawal.
529 Withdrawal Strategies
- If student loans were used by the beneficiary, up to $10,000 can be used to pay those down.
- Or, you can take the money out of the account. But, you may have to pay state tax and federal income taxes along with a 10% penalty on the earnings.
- You can avoid the penalty in some cases. The amount of any scholarships can be removed penalty free. Also, if the person joins the military, the penalties might be avoided. Although these may avoid penalties, withdrawing the money will still require paying the taxes.
Before making any withdrawals, I recommend talking to a financial professional to make sure you get all the benefits you can.
Frequently Asked Questions About 529 Leftover Funds
- Can You Use 529 Money To Buy A House?
Technically, yes, you could use unused funds to buy a home. However, you will end up paying taxes and a 10% penalty on the earnings you withdrew. If you can withdraw just your contributions, with no earnings, there are no taxes or penalties due. That is because the 529 is funded with AFTER tax money, or money you already paid taxes on.
- Can I Use My Child’s 529 To Pay Off My Student Loans?
Once again, technically, yes. And once again, you will owe taxes and the penalty fee on the earnings. Now, if your child is no longer needing the 529, you can make a change of beneficiary to yourself. Then you can pay up to $10,000 on your student loans. Note that there is a $10,000 lifetime limit, per borrower, so if you use the 529 money to pay your student loans, you can not use more money (above that $10,000 limit) to pay anyone else’s student loans.
- Can I Transfer My Child’s 529 To My Grandchild?
Absolutely yes you can. Just be aware that once it is transferred, your child can no longer use it without – you guessed it – taxes and a penalty. And, as the account owner, these are your tax and penalty problems, not your child’s or grandchild’s.
- Can I Return Unused 529 Funds?
If you use 529 funds for a college expense and for some reason the college refunds the money, you can put that money back into the 529. This is a recontribution to the 529. You have 60 days from the date of the refund to make the recontribution and the amount cannot exceed the refund.
If you decide to keep the money, or forget to recontribute within the 60 days, it is considered a non-qualifying expense. You will have to pay state and federal income tax, along with a 10% penalty on the earnings.
Wrapping It Up
Congratulations, you made it to the end of my article and hopefully got the answer a few of your 529 questions. I touched on things like what to do with leftover 529 money, what happens if you don’t use it, and leaving money in a 529 forever.
I also covered how much you can withdraw, penalties, withdrawal strategies, and some additional frequently asked questions. Now go forth and impress other parents with your 529 knowledge!
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