Planning for your child’s education is a significant financial commitment, and 529 plans offer a tax-advantaged way to invest in their future. But what happens when your child doesn’t use all the funds? Whether they received a scholarship, chose a different path, or you simply overestimated the costs, there are several ways to manage unused 529 plan funds without incurring penalties.
- Use the 529 funds for additional education or training
If your child is considering graduate school or further education, the remaining 529 funds can be applied toward these expenses. Additionally, these funds can be used for community colleges and accredited professional programs, including specialized training such as vocational courses, coding boot camps, and professional certifications.
- Change the beneficiary
One straightforward option to use leftover 529 funds is to change the beneficiary to another qualifying family member. This could be a sibling, cousin, niece/nephew, or even a grandchild. Parents can also transfer the beneficiary to themselves, allowing them to use the funds for their own professional development. Furthermore, 529 plans aren’t limited to post-secondary education; up to $10,000 per year can be used for tuition at private K-12 schools.
- Use the 529 funds to pay down student loans
Thanks to the SECURE Act, you can use up to $10,000 of the leftover funds to pay down qualified student loans for the plan beneficiary or their siblings. This includes both principal and interest payments. However, note that the loan interest paid with 529 earnings will not be eligible for the student loan interest deduction.
- Roll extra 529 dollars into a Roth IRA
Starting in 2024, you can transfer 529 plan balances into a Roth IRA, providing a way to boost retirement savings. This process comes with specific restrictions, including adhering to annual contribution limits and a lifetime limit of $35,000, as detailed in this article.
- Scholarship Exemption
If your child is awarded a scholarship or grant that lowers their need for 529 plan funds, you can withdraw an amount equal to the scholarship without incurring the 10% penalty. It is important to note that you will owe income tax on the earnings from the withdrawn amount.
Managing unused 529 plan funds can offer a range of opportunities beyond their initial educational purpose. By understanding and utilizing these strategies, you can ensure that your 529 plan continues to serve your family’s financial goals. Consulting with a financial advisor can help you make informed decisions and navigate any potential tax implications, ensuring that you make the most of your 529 plan’s flexibility and benefits.
