According to a Morningstar report, more American families are turning to 529 funds than ever before. Households have invested $441 billion in 529 accounts by the end of 2023, while about 1 in 3 families used the account to pay for college.
However, further stats show that the average family's 529 savings covered 9% of attendance costs, suggesting that other sponsorship means combined in footing college bills. Scholarships, need-based financial aid, cheaper college tuition, and possibly donations from family and friends could help offset college bills that ensure there are leftover funds in the 529 account.
But how can you withdraw unused 529 funds and maximize them for your future finances? We’ve compiled highly creative ways to use 529 in this post and further secure your family’s (or ward’s) financial future post-graduation.
4 Tips to Maximize Leftover Funds in Your 529 College Account
Below are 4 tips to maximize leftover funds in your 529 college account:
1. Change the Beneficiary
This might well be the easiest idea to think of, especially if you're certain the initial beneficiary won't need the unused 529 funds for, say, grad school. You may change the beneficiary to another "qualified family member," which could be a sibling, step-sibling, parent, or other relative, based on the IRS qualifications. Thankfully, changing the beneficiary of a 529 doesn't attract any withdrawal fees or tax penalties.
2. Offset Student Loans
According to the SECURE 2.0 Act, families can take tax-free 529 plan distributions to offset student loans. Meanwhile, you can offset up to $10,000/year in qualified student loan repayments each per beneficiary of the 529 plan (brother, sister, step siblings, etc). That’s possible since the fund doesn’t have time limits. Students may keep contributing to them all through college or after graduation, in hopes of using leftover funds for offsetting student loans tax-free.
3. Roll the Funds into a Roth IRA
A 529 saver can roll money from their plan to a Roth individual retirement account, per Secure Act 2.0 provisions, free of income tax or penalties. However, there are limitations to this transfer.
To qualify for a rollover to a Roth IRA, a 529 account must have been operating for 15 years. Also, there's a lifetime cap that stipulates no more than $35,000 in 529-to-Roth rollovers. Depending on how much funds you intend to transfer, it might become a multiyear project, that sees you make annual IRA contributions within the maximum contribution allowed. In 2024, investors under age 50 can contribute a maximum of $7,000 to their Roth IRA funds.
4. Withdraw the Money
Families can take a non-qualified withdrawal from the contributions without the hassles of filing tax forms or paying penalties. In some cases, such as if the child receives scholarships, they can withdraw earnings used for nonqualified expenses without any penalties, up to the scholarship's worth.
Aside from that, you may withdraw any earnings not used for qualified expenses after paying income tax and a 10% penalty. That way, families can immediately access the funds, rather than redirect it towards another account or a qualified education expense.
Conclusion
529 college savings help many American families in funding their education. If you don't eventually use up your 529 college savings, you can change the beneficiary or withdraw your unused 529 funds into Roth IRA funds, another investment/savings/expenditure plan, or toward a loan repayment.