Advertisement
529 Plans

What Do I Do With Unused 529 Plan Money?

Money that's left in these college-saving funds are subject to income taxes and an early-withdrawal penalty, except in some circumstances.

Question: I opened 529 college-savings accounts for both of my grandsons. One of them just won a four-year scholarship to college. If I don’t use the money for college expenses, do I have to pay a penalty?

Answer: Generally, if you withdraw money from a 529 for anything other than eligible college expenses, the earnings portion of each withdrawal will be subject to income taxes and a 10% early-withdrawal penalty. (When you take money out of a 529, earnings and contributions are withdrawn proportionately.) However, there are several circumstances in which you avoid the penalty.

Advertisement - Article continues below

One is if your child isn’t using the money because he or she received a scholarship. In that case, you can withdraw up to the amount of the scholarship from the 529 without paying a penalty, although you’ll still have to pay income taxes on the earnings. See What to Do When Scholarships Complicate 529 College Savings for more information.

Before you pay taxes on the withdrawal, first see if you can use the money for other eligible expenses. For instance, even if your child received a scholarship for full tuition, you can use the 529 money tax-free for required books and supplies, fees, and room and board. You can even use 529 money tax-free for room and board if your child lives off-campus, as long as he or she is attending college at least half-time. See Using 529 Plan Funds to Pay Rent for more information. You can also use 529 money tax-free for a computer, printer, other related equipment and Internet access (the college student must be the primary user). See New Rules for Tax-Free Spending From Your 529 College-Savings Plan for more information.

Advertisement
Advertisement - Article continues below

There’s no time limit for taking withdrawals, so you can keep the money in the account if one of your grandsons decides to take time off and go back to college later on. Or you can switch the beneficiary of the 529 to another eligible family member. Eligibility is based on the relationship to the beneficiary. Eligible family members include the beneficiary’s spouse, child, sibling, parent, aunt or uncle, niece or nephew. See How to Transfer Money Between 529 College-Savings Accounts for more information.

See IRS Publication 970, Tax Benefits for Education, for the full list of eligible beneficiaries and more information about eligible 529 expenses (the “Qualified Tuition Program” section focuses on 529s).

Advertisement

Most Popular

Chiropractor Trying to Get Business the Wrong Way – Illegally
careers

Chiropractor Trying to Get Business the Wrong Way – Illegally

A new chiropractor’s fledgling business plan to attract patients may sound reasonable at first look, but it’s actually against the law, and the same p…
June 30, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
13 Luxury Goods That Are Cheaper at Costco
spending

13 Luxury Goods That Are Cheaper at Costco

You could be missing out on huge savings: Costco sells a limited selection of luxury goods at discounted prices, both in-store and online.
June 27, 2020

Recommended

7 Ways the Pandemic Will Change College Forever
college

7 Ways the Pandemic Will Change College Forever

Colleges and universities face steep budget cuts, enrollment challenges and new types of competition as a result of COVID-19. We cover the changes you…
June 19, 2020
How to Fund a Memorial Scholarship to Honor a Veteran
college

How to Fund a Memorial Scholarship to Honor a Veteran

With the help of a college or community foundation, you can establish a scholarship in the name of a loved one to help students in perpetuity.
May 24, 2020
How to Endow a Scholarship to Honor a Veteran
college

How to Endow a Scholarship to Honor a Veteran

You may be able to set up a scholarship fund through a college or community foundation, or support educational programs through a charity that special…
May 24, 2020
Gifts for Grads to Build Good Money Habits
college

Gifts for Grads to Build Good Money Habits

Today’s graduates aren’t destined to share the same fate as past generations, so it’s important for them to ramp up their money skills.
May 13, 2020