What happens if your child ends up not spending all (or any) of the funds in their 529 plan? Maybe they received a scholarship or opted to enroll in a U.S. Military Academy, and now you need to figure out what to do with the money you saved for them. Although it may seem farfetched that your child will not need every penny, about 10% of families end up having funds leftover that the original beneficiary did not need. To put that in perspective, there are more than 14.8 million 529 plan accounts, and at the end of 2020, they were holding a record-high of $425 billion! If you and your child find yourselves in such a predicament, don’t worry, you have plenty of options to ensure the remaining money is put to good use.
- Spend it now
Recent grads can continue to spend the funds on qualified educational expenses within the same calendar year as graduation. Qualified expenses include living expenses (including off-campus if rent and utilities don’t exceed what their school would have charged for room and board), supplies, computers, equipment, books, etc. If you’ve paid out of pocket for any of these expenses, you can make a withdrawal to reimburse yourself.
- Transfer the funds to another beneficiary
Two benefits of 529 plans is that there is no time limit on when you must spend the funds and you can change the beneficiary to another qualifying family member without tax consequences. It’s often suggested that leftover funds be saved for future grandchildren as the assets will have many years to continue growing while they’re invested; however, you can also name most other relatives as a new beneficiary. Qualifying family members include, but are not limited to, the beneficiary’s spouse, children, siblings, in-laws, aunts/uncles, nieces/nephews, and first cousins. This is a great option if you know another family member who is planning to go to college and want to help them pay for their education. With the passing of the 2017 Tax Cuts and Jobs Act, some states allow you to use the funds to pay for private school K-12 expenses.
- Save the 529 plan funds for future education
The funds in 529 plans are eligible to be used for attending traditional universities, community colleges, art and music schools, technical and trade schools, and higher education such as graduate schools. A general rule is that if the institution receives financial aid, it qualifies to receive 529 plan funds.Regardless of the path the beneficiary takes, they can choose where to spend their education savings and establish the foundation for their future careers.
- Use the funds to make student loan payments
The SECURE Act permitted families to take tax-free 529 distributions to repay student loans. A beneficiary can use up to $10,000 to put toward their own student loan debt or that of their spouse, children, or grandchildren. The $10,000 is a lifetime limit for the plan itself, regardless of any change in beneficiary or ownership. It needs to go towards a qualified education loan and can cover both principal and interest payments. Before proceeding with a distribution for student loan repayment, it’s a good idea to check with your plan administrator and/or financial advisor.
- Last resort, use the funds for non-qualified expenses
If none of the other options fit your family’s needs, you can choose to spend remaining funds on non-qualified expenses. Since 529 plans are funded with after-tax dollars, contributions will not incur additional tax, but the earnings portion of any non-qualified distribution will receive a 10% penalty and be subject to income tax. With 529 plan accounts, principal only withdrawals are not permitted, so every withdrawal includes both contributions and earnings. This means that if there have been gains on assets in the account, you can expect taxes and the penalty to be applied to distributions made for non-qualified expenses. There are a few exceptions to the 10% penalty (though income tax would still apply), such as if the beneficiary dies or becomes disabled, receives educational assistance from a qualifying employer, or receives a tax-free scholarship.
With all these possibilities in mind, you can rest assured that funds leftover in a 529 plan account can still be used and certainly will not go to waste. Regardless of what type of school or program the beneficiary chooses to attend, education is a gift that can help them expand their mind, network with those who share their interests, and open doors to exciting opportunities!
If you aren’t sure the best way to proceed or want to confirm you’re following the guidelines for 529 plan accounts, reach out to a professional such as a CERTIFIED FINANCIAL PLANNER™ or CPA for help. Your plan administrator can also be a great resource for any rules specific to your state and plan.