8 ways to use leftover 529 funds

October 04, 2022

You’ve set aside money in a 529 college savings account, naming a child, grandchild, or other loved one as beneficiary so they could go to college. Now the funds aren’t needed — maybe because the beneficiary received a substantial scholarship, paid for college from a trust or inheritance, or decided to forgo college altogether. It’s also possible your student chose a school where tuition was cheaper than expected and they’ve finished college with funds to spare.

Rest assured, you do have choices for making the most of excess or unused 529 funds! We’ve outlined eight of them here; your unique circumstance will determine which option is best for you.

Save the funds for further educational needs

A 529 account is versatile; the funds can be used at a variety of institutions to meet a student’s career goals. The original beneficiary of your 529 may decide to return to college, extend their education, or pursue a different educational path. The plan funds can be used at public and private colleges and universities; vocational, trade, technical, and professional schools; and even some foreign institutions. Depending on your plan’s rules, they may even be able to use the funds for graduate school. If it turns out they really don’t need the funds, you can always change the beneficiary to another member of the family — or select another option.

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Consider changing the plan’s beneficiary. Funds in a 529 college savings account can be transferred without income tax consequences to a family member. While a sibling in the same family seems like the obvious choice, the list of eligible family members is quite long and includes parents, grandparents, step-relatives, and extended family such as first cousins — see your plan’s program disclosure statement for a complete listing.

Give yourself the gift of education

Another consideration is to use the funds yourself for career acceleration courses, a second (or first!) degree, or any number of certifications in the pursuit of career advancement, enrichment, or lifelong learning. Get that certification you need for work, or take the photography classes you’ve had your eye on. Make sure to review the qualifications for an eligible educational institution and qualified education expenses.  You’ll also want to check with the plan’s administrator or your tax professional if you’re not on the list of eligible relatives to ensure you’re willing to incur the tax implications.

Pay on a student loan

If your beneficiary did attend college and also has some student loan debt, or if they have a sibling who had to go the educational loan route, you may have found another use for your college savings plan. If your plan includes repayment of qualified education loans as a qualified education expense, you can pay up to $10,000 in qualified education loan repayments for the beneficiary and/or a sibling. You’ll want to have a conversation with your tax professional first to make certain this move aligns with your tax filing plans, as the portion of student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

Leave a legacy

Your tax advisor may recommend you use the plan as an estate-planning tool. Since there is no time limit on when you have to spend your 529 plan savings, this could be an opportunity to change the beneficiary on your account and have any unused money used as an educational legacy for your grandchildren — even if they haven’t been born yet. 529 plans offer a unique opportunity since the value is removed from your taxable estate, but you retain control of the account. 

Make a gift to the beneficiary

You might consider transferring ownership of the 529 college savings plan to the plan’s beneficiary, especially if you were not the only person making contributions. Once the beneficiary becomes the owner, they can decide whether to save the funds for future educational endeavors or make an early withdrawal. This means, however, that they’ll also incur some financial responsibility: the plan may be counted as an asset if they decide to pursue or resume an education, and any nonqualified withdrawal will be subject to taxes and penalty.

If there’s a chance that the 529 plan may be used for education at a later date, it may be wise to retain ownership of the account. When a beneficiary is also the owner of their 529 plan, the account is counted as an asset of the student by FAFSA.

Withdraw penalty-free

If your 529 is still flush with cash because your student received a scholarship, you can withdraw up to the amount of the award without any parameters on its use (it doesn’t have to be education-related).  Please note, while the withdrawal is not subject to the IRS 10% penalty tax, income tax will apply to any earnings. There are some other instances in which you can take a non-qualified withdrawal penalty-free, such as if the beneficiary has attended a U.S. Military Academy, has passed away, or became disabled. You’ll want to check with your tax professional or plan administrator for details, and to see what the tax implications will be on any gains in the account.

Take the funds back

If none of these options work for you  — or if you just really need the cash — you can take the funds back as a non-qualified distribution. However, it’s important to remember that the earnings portion of the withdrawal for non-qualified expenses is subject to a 10% penalty and will be subject to state and federal income tax. Additionally, non-qualified withdrawals may result in the recapture of any previously claimed state tax deductions, so this might be another of those tax pro questions.

Take some time before deciding what to do with the 529 plan funds in question. Since there’s no time limit, you can thoughtfully consider your choices without pressure in most situations. Talk to your tax professional before making a withdrawal and know that UBT’s friendly experts are here if you have questions. You can learn more about 529 college savings plans here.

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