Have Money Left in a 529 College Savings Plan? Here’s What You Can Do
Saving for a child’s education is an important investment in their future. But what happens when they graduate with money remaining in their 529 college savings plan, receive a scholarship, or decide to take a different educational path?
The good news is that unused 529 funds don’t necessarily have to go to waste. Families have several options for putting those savings to good use, including opportunities to help future generations.
At DBMCPA, we encourage families to understand these options before making decisions about leftover education savings.
1. Transfer the Funds to Another Family Member
One of the simplest options is to change the beneficiary of the 529 plan.
If one child doesn’t need all the money saved for their education, the remaining funds can generally be transferred to another qualifying family member, such as a sibling, without triggering federal income taxes.
This flexibility can be especially helpful for families with multiple children or relatives who may have future education expenses.
2. Save the Money for Future Generations
A 529 plan doesn’t have an expiration date simply because the original beneficiary finishes school. In many cases, the funds can remain invested and potentially continue growing for years.
For example, grandparents who originally established a 529 plan for their child may eventually be able to use the remaining funds to help pay for a grandchild’s education.
This makes 529 plans a potential tool for multigenerational education planning. However, changing beneficiaries to younger generations may have gift or generation-skipping transfer tax implications, so planning ahead is important.
3. Consider Rolling Unused Funds Into a Roth IRA
Another option introduced under the SECURE 2.0 Act allows eligible beneficiaries to roll over unused 529 funds into a Roth IRA.
Under federal law, qualifying beneficiaries may transfer up to $35,000 over their lifetime, subject to several requirements:
- The 529 account must have been maintained for at least 15 years.
- Contributions made within the previous five years, along with their earnings, are not eligible for rollover.
- Annual IRA contribution limits and earned-income requirements apply.
- The funds must be transferred directly into a Roth IRA belonging to the 529 plan beneficiary.
Important for California taxpayers: California does not conform to the federal tax-free treatment of these rollovers. As a result, a rollover that qualifies for favorable federal treatment may still result in California income taxes and an additional state tax.
Families should carefully evaluate the federal and California tax consequences before pursuing this option.
4. Withdraw the Remaining Funds
If the funds are no longer needed for education and other options aren’t appropriate, families can choose to withdraw the remaining balance.
However, nonqualified withdrawals generally result in federal income tax on the earnings portion, plus an additional 10% federal tax unless an exception applies. California taxes may also apply.
Certain exceptions, including qualifying scholarships, may eliminate the additional federal tax, although regular income tax on the earnings may still be owed.
Make the Most of Your Education Savings
A 529 plan can offer more flexibility than many families realize. Whether you’re helping another family member with education expenses, preserving savings for future grandchildren, or exploring retirement savings opportunities, unused funds may still play a valuable role in your family’s financial future.
At DBMCPA, we encourage clients to review their 529 accounts when a child graduates, receives a scholarship, or no longer needs the full balance. Our team can help evaluate the available options and the potential federal and California tax implications so you can make informed decisions about your education savings.
