529 Plans

What to Do With Leftover Money in a 529 College-Savings Plan

There's no time limit for spending money in a 529 college-savings plan, so leftover dollars in an account can be used by other family members now or by a new generation in the future.

Question: My children are now through with college, and we still have some money in their 529 college-savings plans. Can that money remain in those accounts and be used to fund their children's college someday? If so, what steps need to be taken to do that? And what happens if I withdraw the money and use it for things other than education?

Answer: You can't name children yet to be born as 529 beneficiaries, but you can name other eligible family members as beneficiaries. Or you can keep your kids as the beneficiaries and eventually make the switch after your grandchildren are born. There's no time limit for making the change or for using the money in the account, says Brian Boswell, president of 529Expert.com. Eventually, you will be able to use the money in the 529 for your grandchildren's college expenses (tuition and fees, room and board, books, and a computer for the college student). Plus, the new tax law also lets you withdraw up to $10,000 each year per beneficiary to pay tuition for kindergarten through 12th grade. See 529 Savings Plans Have More Uses for more information about the new rules. See IRS Publication 970 for a list of eligible family members you can name as beneficiaries.

Alternatively, you could keep your children as the beneficiaries and use the 529-plan money for graduate school expenses if they end up going back to school. As long as the school is an accredited higher-education institution, then grad school tuition, fees and books are eligible for tax-free 529 withdrawals. (The student must attend school at least half-time to be able to use 529 money for room-and-board expenses.)

If you withdraw the money for anything other than eligible education expenses, you'll have to pay income taxes and a 10% penalty on the earnings portion of the withdrawal. (If your child receives a scholarship, you can withdraw up to the amount of the scholarship without penalty, but you will have to pay taxes on the earnings.) The principal isn't subject to taxes or penalties, but keep in mind that 529 account owners can't withdraw only principal, says Boswell. "Every withdrawal will include an earnings portion, meaning that if the owner makes a nonqualified withdrawal, he or she is going to pay a penalty tax on earnings unless the withdrawal qualifies for an exemption, such as the death or disability of the beneficiary," he says. The portion of each withdrawal that is subject to taxes and penalties is prorated based on the portion of the total account balance that comes from earnings; the rest is a nontaxable return of contributions.

For more information, see the Qualified Tuition Program section for IRS Publication 970, Tax Benefits for Education.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021
Stock Market Holidays in 2021
Markets

Stock Market Holidays in 2021

Is the stock market open today? Take a look at which days the NYSE, Nasdaq and bond markets take off in 2021.
September 2, 2021

Recommended

Free (or Cheap) College for Retirees in All 50 States
retirement

Free (or Cheap) College for Retirees in All 50 States

Whether it's to complete a degree, gain new knowledge or just for fun, retirees can collect their books and get on (back) to school in a most inexpens…
August 25, 2021
11 Things You Don’t Need for College
college

11 Things You Don’t Need for College

College sticker shock when you first see the bill for tuition, room and board (and all those nebulous activity fees) is bad enough.
August 13, 2021
School’s Out for Summer … But Tuition Is Back in the Fall
Paying for College

School’s Out for Summer … But Tuition Is Back in the Fall

Giving the gift of education never goes out of style. Here are some different options for helping out the young person in your life.
July 31, 2021
States Boost 529 Plan Incentives
529 Plans

States Boost 529 Plan Incentives

Many states provide a tax break for residents, and now they're offering matching contributions and other perks.
July 9, 2021