What to Do With Leftover 529 Plans
Picture this. For years you save diligently for your child’s college education in a 529 plan, but then you learn they don’t actually need the full amount. What can you do with the unused funds? It’s a tricky question because there are so many rules to navigate. If you’re in this situation, it’s important to understand the implications to your financial plan so you can make the most of the funds.
I wrote this article to shed light on the options available to you, with the big-picture goal of helping you build a solid financial future.
1. Continue Saving for Education
The first option I want to explore is continuing to save for future education expenses. This could include professional certifications, graduate school, or another family member’s tuition costs.
You can even make yourself the beneficiary by using a 529 plan to pay for continuing education. Tuition and fees from most universities and community colleges are included in the eligible 529 plan expenses.
By changing the name of the beneficiary, you’re effectively transferring the funds to a different recipient. As long as the new beneficiary is a qualifying family member, you can change the name of the beneficiary without tax consequences.
2. Roll Extra Funds to a Roth IRA
Another possibility for your leftover 529 plan funds is to roll them over to a Roth IRA account.
Here’s how it works.
Thanks to the SECURE Act 2.0, starting January 1, 2024, you can transfer money from a 529 plan to a Roth individual retirement account without incurring tax penalties. The account must have been kept up to date for at least 15 years in order to be eligible for a transfer, and the transferred funds must have been contributed at least five years earlier.
The transfer amount is currently capped at a $35,000 lifetime limit. However, the Roth IRA annual contribution limit ($7,000 in 2024 for those under 50) still applies. Before trying this, you might want to consult a financial advisor because the IRS has not yet set clear guidelines on the rollover of a Roth IRA.
3. Make Student Loan Payments
In addition to allowing rollovers from 529 plans to Roth IRA accounts, the SECURE Act 2.0 allows you to withdraw money tax-free from 529 plans to make student loan payments.
Both principal and interest payments to reduce a student loan balance are considered qualified education expenses. Keep in mind, though, the part of the student loan interest paid for with tax-free 529 plan revenue is not allowed as a student loan interest deduction.
Repayments of eligible student loans up to $10,000 can be made by each 529 plan beneficiary and their siblings (brother, sister, or stepsibling). Additionally, because 529 plans have no time limits, students can continue making contributions to them during their time in college or after they graduate. They can then utilize any money left over to pay back student loans tax-free.
4. Withdraw the Funds
The final option I want to discuss is withdrawing unused 529 plan funds for non-educational expenses. Of course, it’s your money and you can use it anytime, but it’s important to consider the tax implications of withdrawing fund earnings for non-educational expenses.
In some cases, it is possible to take a non-qualified withdrawal without having to pay a penalty on the earnings. For example, if a beneficiary dies, becomes disabled, or attends a U.S. military academy, you don’t have to pay taxes on the earnings you withdraw. Another exception to the rule is if your child is awarded a scholarship, you can withdraw up to the amount of the award and spend it on anything.
Partner With a Professional
There are options for what to do with leftover 529 plan funds, but the guidelines are complex. Thankfully, you don’t need to navigate the rules on your own.
At the Rosamond Financial Group, we can help you evaluate your options, consider the tax implications, and make informed decisions about your leftover 529 plan funds.
Get started today by booking a free introductory meeting online, calling my office at 830-798-9400, or sending an email to solutions@rosamondfinancialgroup.com.
About Preston
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with over two decades of industry experience. He provides comprehensive wealth management and financial services to successful business owners, corporate executives, and affluent retirees who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch, a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing solutions@rosamondfinancialgroup.com or schedule a call on his online calendar.