Last month, we reviewed 529 College Savings plans, why people use them, and how the use of funds has expanded over the last few years.
This month, we’ll review options for unused savings in order to minimize taxation or penalty on earnings, if not use for qualified education expenses.
What if I have unused 529 dollars?
Some children choose not to go to college or to enter the trades through an apprenticeship program, so there are times when the 529 plan savings may be more than needed. One great aspect of 529 plans is that they allow for unlimited change in beneficiaries to members of the same family without tax implications. Family members include: siblings, children, grandchildren, parents, nieces, nephews, uncles, aunts, their spouses, and first cousins.
For situations where a change in the beneficiary would not be helpful, there are a couple of other options to avoid taxes and penalties on unused 529 savings.
First, any penalty on distributed earnings is waived if the beneficiary receives a tax-free scholarship, attends a U.S. Military Academy, or should die or become disabled. While the earnings distributed would still be subject to taxation, no penalty would be assessed in this situation.
Second, 529 funds can be rolled over to a 529 ABLE account, specifically for individuals living with a disability. The ABLE Act of 2014 allows Americans living with disabilities to save money for college and other expenses in a tax-deferred account to supplement private insurance and public benefit.
Finally, beginning in 2024, as a result of the SECURE Act 2.0 signed into law in 2022, up to $35,000 of 529 assets can be rolled over into a Roth IRA in the same name as the beneficiary. There are stipulations to this option, like the 529 plan must have been open for 15 years or longer, and no funds contributed within the last five years are eligible for rollover, but this can still be a way to jumpstart a beneficiary’s retirement savings should there be excess savings.
Again, as we approach the end of the school year, it might be a good time to reach out to us about your options to save for college or other educational expenses. We are always here to help.
Prior to investing in a 529 Plan, investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.