529 Plan Leftovers? Explore Your Options

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Three college students working on an assignment in a classroom. Two are looking at a laptop together and one is writing on a piece of paper.A 529 account is a great tool for saving toward college and higher education expenses for your children or other family members. However, you may find yourself with leftover funds if no other family members plan to attend college. Withdrawing those remaining funds for non-educational expenses can result in a 10% penalty. Fortunately, there are several options available for handling unused 529 funds.

Tax-Free Transfers to a Roth IRA

Funds from a 529 account can be transferred tax-free to a Roth IRA for the account’s beneficiary. This option is ideal for people whose children did not attend college or have leftover funds after graduating. It provides a useful alternative for families who do not plan to use the funds for further education. However, there are limitations to this option. To execute a rollover, the 529 account must have been open for at least 15 years. The rollover amount cannot exceed the annual Roth contribution limit of $7,000 for 2024. Additionally, there is a lifetime limit of $35,000 per person. As a result, it would take at least five years to roll over the full $35,000 lifetime limit.

Additional Ways to Use 529 Funds

Other options for using leftover 529 account funds include transferring the account to a new beneficiary or taking a tax-free distribution to pay off student loans. If you wish to transfer the account to a new beneficiary, it is important to note that the beneficiary can only be changed twice a year. Additionally, the new beneficiary must be related to the original one, and you can only have one beneficiary at a time. There are limitations if you decide to use the funds in the account to pay down student loans. You can only use up to $10,000 of leftover funds to pay down federal and private student loans, but they cannot be used to pay off any credit card debt or personal loans. The account holder can also pay off loans without changing the name of the beneficiary. Another option for leftover funds is paying for qualified K-12 expenses. Younger kids who are enrolled in private schools may be able to use 529 funds to pay up to $10,000 per student per year.

A final option for leftover 529 funds is withdrawing from your 529 account for non-educational expenses. The money you withdraw will be prorated between the money you contributed and the money you earned, so only the earned portion of the amount you withdraw will be taxed.

Qualified Education Expenses to Remember

Don’t forget the qualified expenses you can cover with a 529 plan! These include tuition and housing, which apply to on-campus and off-campus living arrangements. Additionally, funds can be used for an on-campus meal plan. If your student lives off-campus, they can also designate food costs as a qualified expense.

Books and supplies required by classes are also considered qualified expenses, and many students will need supplies specific to their program or major. If, for example, the beneficiary is a music major and is required to have an instrument for their classes, it would be considered a qualified education expense that they could use 529 funds to pay for. An art major would require canvases and other supplies related to art class that they can use 529 funds to cover.

We’re here to help

Navigating the options for leftover 529 plan funds can be complex, especially considering the various limitations and tax implications. Consulting with a qualified tax advisor is essential to ensure you maximize your savings while avoiding penalties.

If you have questions about the options outlined above or need assistance with transferring funds, changing beneficiaries, or evaluating your situation, JLK Rosenberger is here to help. For additional information, call 818-334-8623 or click here to contact us. We look forward to speaking with you soon.