Options for unused 529 Plan funds
Kids change their minds. Life happens. Fortunately, you don’t need to worry about losing any funds that have been set aside in a 529 Education Savings Plan, even if the named beneficiary (i.e. “the kid”) decides not to attend college and the plan is overfunded.
Just to recap, a 529 Plan is a great vehicle to help you save for a loved one’s education. It’s structured similarly to a traditional IRA, so earnings inside a 529 Plan account can grow tax-free. Over time, that tax advantage compounds and the savings could really add up.
However, many account owners often ask: What if my loved one decides not to go to college? What if they decide to attend a more affordable community college or vocational school? Or, what if there’s money left over in the 529 Plan account? Will I face any tax ramifications, penalties, or even lose those funds if I don’t use them for education?
Fear not. There’s a great deal of flexibility associated with 529 Plans, and there are many ways to use up those funds—without penalty—even if your loved one does not go to college. Consider some of these facts:
- There is no expiration date. Any funds you have set aside in a 529 Plan can be used at any time, as long as they are for qualified education purposes. So even if your loved one chooses not to go to school today, he or she may opt for some continuing education down the road. In this scenario, you’ll still be ready.
- Trasferable to another beneficiary. If one child decides not to go to school, you can easily transfer those 529 dollars to any relative of the original beneficiary. That could be another child—or even to yourself—if you are pursuing more education. As always, the same rules apply as to what is defined as a qualified education use.
- Rollover to a Roth IRA. The SECURE 2.0 Act now provides the additional flexibility to roll over any unused 529 assets into the account beneficiary's Roth IRA, without incurring a penalty for “non-qualified” withdrawals. There are, of course, some rules and limits. But for now, rest assured that any unused 529 Plan funds can also help the beneficiary get a jump on saving for retirement.
- Repay student loans. Account owners have the ability to use leftover 529 Plan funds to repay student loans after college—up to a limit. This allows them to help their loved ones get out of debt and on the path to a better financial future.
- Pay for apprenticeship programs. If there’s money left after college, there’s a good chance that it can be used to help defray any textbooks, fees or other qualified equipment related to any apprenticeship programs or vocational training, which are often required in many new careers.
Special Considerations
There are stipulations in place even if your named beneficiary receives a scholarship. In such a case, you can still withdraw up to the amount of the award without the 10% penalty (although regular income tax will apply to any earnings). Moreover, there are 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 or has passed away or became disabled. As you can see, the flexibility of the 529 Plan runs deep, and it remains an option worth considering for many Americans.
Of course, things happen and you may need to access 529 Plan funds quickly, maybe for a home renovation or some other important but non-qualified educational use. No problem. This is your money and you are entitled to it. However, you will be subject to a 10% penalty, as well as any state and federal income taxes.
In the end, we continue to believe that 529 Plans offer families a wonderful opportunity to help their loved ones manage the rising cost of education. And in the event plans change, account owners can take comfort knowing that there’s flexibility. There are a few rules that need to be followed, as always, and that’s where one of our U.S.-based investment specialists may be able to help. But to us, the extensive benefits of 529 Plans, along with their substantial flexibility, are quite intriguing.
Learn more about the Victory Capital 529 Education Savings Plan.
