- Protect the tax-advantaged status of your savings by naming a new eligible beneficiary for unused 529 funds.
- To preserve tax-advantaged treatment of 529 funds, change the beneficiary to an eligible family member of the original beneficiary.
- Withdrawals that aren’t used for qualified education expenses at eligible institutions may be subject to taxes and penalties.
After years of contributing, your 529 plan balance has likely grown quite a bit. You want to make the most of every penny. However, to maintain the plan’s tax advantages, you must use withdrawals for qualified education expenses at eligible institutions.
What happens if you have money left over in your 529 account? Perhaps you have set aside more than you need, or your student qualified for a scholarship. In some cases, the account’s beneficiary decides not to go to college at all. Fortunately, you can take steps to protect your savings.
Options for Unused 529 Plan Funds
One of the most popular features of the 529 college savings plan is the option to change the beneficiary. The 529 plan is designed so the account owner – the individual who opens the account – always maintains control of the funds, no matter how old the beneficiary is. Account owners can elect to name a new beneficiary who is an eligible family member of the original beneficiary, which offers an easy solution for maintaining the tax advantages of unused savings.
There’s no age limit for the beneficiary of the 529 college savings plan. In fact, the only restriction is that the new beneficiary must be an immediate family member of the original beneficiary. This includes siblings, parents, grandparents, aunts, uncles and first cousins, so one option is to transfer the plan to the original beneficiary’s younger sibling. However, it’s not uncommon for parents to use excess 529 funds to further their own education, and in some cases, grandparents have taken classes themselves after retirement.
529 Withdrawal for Non-Education Expenses
If a beneficiary change isn’t right for you, you can withdraw 529 funds for non-education expenses. In this situation, you lose the federal tax advantages on earnings, and there are likely to be state-specific tax consequences, depending on the original tax benefits offered in the state where you enrolled in your plan. If you withdraw funds from your 529 plan and do not apply them to qualified education expenses at eligible institutions, you can expect an additional 10% tax penalty on the earnings portion.
Nothing in this article should be construed as tax advice, a solicitation or offer, or recommendation, to buy or sell any security. This article is not intended as investment advice, and Wealthfront does not represent in any manner that the circumstances described herein will result in any particular outcome. Financial advisory services are only provided to investors who become Wealthfront clients.
This article is not intended as tax advice, and Wealthfront does not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should confer with their personal tax advisors regarding the tax consequences based on their particular circumstances. Wealthfront assumes no responsibility for the tax consequences to any investor of any transaction. Investors and their personal tax advisors are responsible for how the transactions in an account are reported to the IRS or any other taxing authority.
For information on any 529 college savings plan contact the plan provider for details on the investment objectives, risks, charges, expenses, and other important information included in the Plan Description and Participation Agreement; read and consider it carefully before investing.
Please Note: Before investing in any 529 plan, you should consider whether you or the beneficiary’s home state offers a 529 plan that provides its taxpayers with favorable state tax and other benefits that are only available through investment in the home state’s 529 plan. You also should consult your financial, tax, or other advisor to learn more about how state-based benefits (or any limitations) would apply to your specific circumstances. You also may wish to contact directly your home state’s 529 plan(s), or any other 529 plan, to learn more about those plans’ features, benefits and limitations. Keep in mind that state-based benefits should be one of many appropriately weighted factors to be considered when making an investment decision.
Earnings on nonqualified withdrawals are subject to federal income tax and may be subject to a 10 percent federal tax penalty, as well as state and local income taxes. The availability of tax and other benefits may be contingent on meeting other requirements.