The original purpose of a 529 plan is to pay for a college education, but what should you do if your child or grandchild graduates and you have money leftover? If you are one of the individuals fortunate enough to be in this position, you are not without options. Luckily, these plans are incredibly flexible. Keep in mind that the owner of the account, not the beneficiary is the one who has the authority to make decisions regarding how to spend leftover funds.
One of the most investment-savvy choices is to keep the leftover funds invested in the 529 plan to grow and use for future grandchildren. The funds in the account can be used tax-free to pay for a private K-12 education up to $10K a year, a college education, and/or qualified educational expenses such as textbooks, supplies, fees, and even things like a new computer. At any time, you can also transfer ownership of the account to your child without incurring any taxes or fees so long as he or she is not also the beneficiary. Please be sure to consult a tax professional
What many families decide to do is to change the beneficiary on the account to another qualified family member of the beneficiary, as no taxes or fees are incurred to do so. The funds remain invested and another individual can benefit from the tax-saving benefits of the 529 plan. Some examples of qualified family members include the beneficiary’s spouse, child, or parent.
Under the SECURE Act of 2020, account owners are now eligible to distribute a combined lifetime limit of $10K for student loan repayments. In other words, only a total of $10K can be used toward student loan repayment for the lifetime of the plan, even if a transfer of ownership or a change of beneficiary occurs. There are a few tax-wise ways to take advantage of this option:
- Use the funds in the account to pay down the original beneficiary’s student loans
- Use the funds in the account to pay down another family member’s student loans
- If you will receive a state income tax deduction, you could continue funding the account up the $10K annual limit for the sole purpose of repaying student loans tax-free
Another way to reduce your tax liability on excess funds in the account is to save them for future qualified educational expenses such as graduate school, continued education for yourself or another family member, specialty school, or other post-secondary education. Remember that this could also include future fees and qualified education expenses, so you may be able to repurpose the money without paying taxes and fees.
Of course, as the owner of the account, you are able to remove the funds and use them on whatever you like. However, any earnings in the account will be taxed as ordinary income and subject to a 10% withdrawal penalty if not used for qualified education expenses.
This option might be beneficial for individuals who need to accelerate their savings in other areas, or need help meeting other financial goals. In other words, if the funds in the account could potentially yield a higher return in another area of need, such as retirement savings, or help you reach another financial goal such as paying down debt, it might be worth it to incur the 10% penalty and pay taxes on earnings. You would trade the penalties now in favor of a greater long-term benefit.
Like any major financial decision, deciding how to repurpose your leftover 529 plan funds should not be a decision made in isolation, but in the context of your overall financial picture. There are families who don’t have another beneficiary to whom they would like to transfer ownership, while others need the capital to help pay down other debts. Since each individual and family will have different needs and different goals, consult your financial advisor to help you weight the relative merits of each option.
If you are unsure how to repurpose your 529 plan funds, or are in need of a trusted financial ally to help you make other important financial decisions, feel free to contact the advisors at William Asset Management to schedule a call today.
Williams Asset Management does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Nicholas Ibello, CFP®, AIF® is a Wealth Manager with Williams Asset Management. Williams Asset Management is located at 8850 Columbia 100 Parkway, Suite 204, Columbia, MD 21045. They offer advisory services as Investment Adviser Representatives of Commonwealth Financial Network®, a Registered Investment Adviser. Fixed insurance products and services offered by Williams Asset Management. For additional information about the services of Williams Asset Management, please call (410) 740-0220 or email at Info@WilliamsAsset.com. © Williams Asset Management. For more information about Williams Asset Management, please visit www.WilliamsAssetManagement.com.
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