From experience and working with our clients, we know planning and saving for college can be difficult. It’s hard to know what the exact future values of tuition will be and what type of institution (private or public) your child will be going to down the line, which is why it’s always a good idea to work with a financial professional as it relates to education savings in order to talk through ideas and strategies. However, one question we get from many clients and individuals is what happens if I over fund and have extra money in my 529 plan? This is a great question, so let’s take a look at the options you have.
With the rapid rate of rising inflation, college tuition and costs for both public and private institutions have been skyrocketing, and who knows where they will continue to go. Obviously, every family has a different need and approach to college so this scenario will not apply to all or even most; however, for those who end up with more than their family needs in their 529 account (whether a child gets a scholarship, decides college isn’t for them, or any other reason), there are a few things you can do.
The first thing many individuals do not know is that you can use 529 money for other educational expenses and purposes, including fees, school supplies, technology, and room and board, as long as it lies within the limits. For more information and details on what additional expenses 529 money covers, head to the IRS website for more. Additionally, a newer item that 529 money can be used for is K-12 tuition at a private, public, or religious school, up to a total of $10,000 per year from all of the designated beneficiaries 529s, which is something that may apply to your family needs.
Another attractive option for extra funds in your 529 account is the fact that 529 accounts can be transferred from one beneficiary to another eligible member of the family, so if you have extra funds in a 529 for an older child, those funds can be transferred to a 529 for a younger one as well. Additionally, another change to the IRS code for 529s is that you can now rollover funds to an ABLE account for the same beneficiary or family member. 529 funds can also be used to pay off qualified student loans for a beneficiary or sibling up to $10,000 per borrower. Next, another option is to let the funds within the 529 plan grow and remain there with the intention to use it later down the line. As you can see, 529 plans are very flexible and are meant to be advantageous to helping you and your family pay for education expenses for future generations.
Lastly, if you decide that you do not want to keep the funds within the 529 account or participate in any other options listed above, you can withdraw the funds and close your account; however, you will be subject to a tax penalty, so make sure you are aware of that tax consequence before doing so. 529s are a really great way to save and get started early on your child or grandchild’s education planning. For those of you who want to learn more about what 529s are and how they can be advantageous to you, check out our blog here. Additionally, if you are thinking about opening a 529 account and are looking for some guidance on how to get started, email us at firstname.lastname@example.org or schedule a complimentary intro call here.