What to do with an unused 529 college savings plan
You have done your due diligence and opened a 529 college savings plan for your child. The account has grown, and your child is just about ready to enroll in college. Suddenly, your child’s need for the account changes. Perhaps your child has decided that post-secondary education isn’t for him, or she has received an all-expenses paid athletic or academic scholarship to a university. This is a very common scenario for many parents. The question that follows is always the same: what do you do with the 529 funds now?
You are allowed to change the beneficiary
The first thing to remember is that your 529 account is yours and your child is the beneficiary. As the 529 account holder, you are allowed to change the beneficiary of the account once per year, provided that the new beneficiary is a family member (which includes yourself). Many people are choosing to go back to school for further education at all different stages in life. By naming yourself as the beneficiary of your 529 account, you can fund your own education with that account. So long as the account is used for qualified education expenses, you will not incur tax penalties for changing the beneficiary.
Rename child as beneficiary
If the child later decides that he will go to college or her scholarship situation changes, you can rename the child as the beneficiary. You can change the beneficiary without penalty if the new beneficiary is the same generation as the old beneficiary. It can also be changed if the new beneficiary is from a generation before the old beneficiary’s generation. Unfortunately, you cannot change the beneficiary from a child to a grandchild.
Options to cash out or use for student loan repayment
If you have no more family members that will be going to college, one option is to cash out the account. However, the earnings in the account that you withdraw will be taxed and a 10% penalty will be levied against those earnings (unless the beneficiary is using a full scholarship, in which case this penalty is waived). A new beneficiary can be a college graduate with outstanding student loan debt. Under the SECURE Act (which was signed into law in December of 2019) student loan repayment of up to $10,000 per beneficiary can be drawn from your 529 account.
529 Plans are not limited to only funding four-year university expenses
One other provision of the SECURE Act is that the act broadened what qualified 529 expenses encompasses. If your child decides that they will be foregoing college and taking up an apprenticeship in a trade, so long as the apprenticeship program is recognized by the Department of Labor, the apprenticeship can be funded by a 529 account. Additionally, 529 plans are not limited to only funding four-year university expenses. If your child intends on attending a technical college or a similar institution, the plan can fund that education as well. Another benefit that was included in the Tax Cuts and Jobs Act (introduced in December 2018) is that 529 plans can now be used for K-12 education costs of up to $10,000 per year. This can be another way to use up 529 funds if you think you may have an overfunded account.
Discussing Options with your financial advisor early
Many 529 account holders find themselves with funds leftover in 529 plans. As noted above, there are many options for dealing with an overfunded 529 plan, but there are also planning opportunities you can explore earlier in the process. Does it make sense to only save half of the expected college costs for a child in a 529 plan? Should you not even use such a specific savings vehicle like a 529 plan? Discussing options and strategies with your financial advisor early and often will help determine what the right course of action is for you and your family.