What to Do With Leftover 529 Plans
Not sure what to do with unused 529 plan funds? You’re not alone—many families face this question, and the good news is, you have options!
In this quick video, we break down four smart ways to use leftover 529 funds, including:
- Saving for future education (even your own!)
- Rolling funds into a Roth IRA tax-free
- Using 529 money to pay down student loans
- Understanding the tax implications of cashing out
The rules can be tricky, but we’re here to help. Watch the video now to explore your best options.
Transcript
Hi, I'm Brigham Glaves, an Associate Advisor here at CGN Advisors. One of the more common questions we get from our clients is what to do with leftover 529 plans. It's a tricky question to answer because there are so many rules to navigate, but while there are no set of answers, you do have some good options. Let's talk about what you can do with your unused 529 funds.
Use 529 Funds for Future Education
To start, let's review the option of continuing to save for future education. This could include saving for professional certifications, graduate school, another family's tuition costs, or even make yourself the recipient of a 529 plan by using the funds to pay for your own continuing education.
Rollover 529 Funds Into a Roth IRA
Option two is rolling unused funds over to a Roth IRA. The Secure Act 2.0 made it possible to transfer money from a 529 plan to a Roth individual retirement account without incurring tax penalties.
There are two eligibility requirements. The account must have been consistently managed for at least 15 years, and the transferred funds must have been deposited for at least 5 years prior. If your existing funds satisfy both requirements, this is a great option.
Pay Down Student Loans With 529 Plan Funds
The Secure Act 2.0 also allows you to withdraw money tax-free from your 529 plans to make student loan payments. Both principal and interest payments to reduce a student loan balance are considered qualified education expenses.
This third option is ideal for paying down student loan debt. Keep in mind that any portion of student loan interest that you pay using tax-free money from your 529 plan cannot be deducted as a student loan interest expense on your tax return.
Withdraw 529 Funds for Non-Educational Expenses
The final option I want to discuss is withdrawing unused 529 plans for non-educational expenses. While you can withdraw the money and use it however you want, this is the least tax-efficient option. Any earnings withdrawn for non-educational expenses will be subject to income tax and a 10% penalty. However, in certain situations, you may be able to withdraw the funds without paying the 10% penalty on earnings.
You can do this if the beneficiary passes away or becomes disabled, if the beneficiary attends a U.S. military academy, or if the beneficiary receives a scholarship, you can withdraw an amount equal to the scholarship, penalty-free, though taxes and earnings still apply.
Navigating 529 Plan Rules With Professional Guidance
As I mentioned in this video, there are options for what to do with the leftover 529 plans, but the rules can get complex. Thankfully, you don't need to navigate those rules on your own.
At CGN Advisors, we can help you evaluate your options, consider the tax implications, and make informed decisions about the leftover 529 funds.
To schedule a meeting, call our Manhattan office at 785-340-3434 or our Rogers, Arkansas office at 479-335-1034.