Three Ways to Spend Unused 529 College Savings
A 529 plan is a state-sponsored investment account dedicated to college savings and other qualified educational expenses. Any adult US resident can open a 529 plan, and you are not restricted to using the 529 plan offered by the state in which you live or attend college. Using a 529 plan to save for a family member’s educational expenses or your own can be a great way to prioritize saving for college tuition or other education goals while incurring tax benefits that can enable you to save more than you otherwise would. Planning for how you will pay for college can help you reduce the overall tuition by avoiding the need for expensive, interest-bearing student loans. Helping a loved one graduate from college debt-free or reducing the amount of their student debt can give them more flexibility and less financial stress as they enter the workforce. They will not need to factor large debt payments into their spending plan and can instead put that money toward other big financial goals, such as purchasing a home or saving for retirement.
If you are a diligent saver or the beneficiary’s college plans change, you may even end up with more money than you need. For example, if your beneficiary attends a relatively inexpensive school or if the investments in your 529 do much better than expected, you may be left wondering what options exist to avoid paying unnecessary taxes and penalties.
Keep the Funds for the Beneficiary’s Future Educational Expenses
First, talk with the beneficiary about their plans for future education. If they plan to attend graduate or professional school, anticipate changing career paths and going back to school for a degree in a different field, or are going into an industry that requires continuing education, such as medicine or engineering, they may have qualified uses for the remaining funds after graduating. Funds in a 529 account do not have a time limit, so you may choose to keep the money waiting in the account until the beneficiary finds a good use for the funds.
Transfer the Funds into the Beneficiary’s Roth IRA
The Secure Act 2.0 is bringing a significant change to what can be done with unused 529 funds, and this change opens the door to a new financial planning strategy that can benefit a child’s financial future. Beginning in 2024, up to $35,000 of the funds in 529 plans that have been open for at least fifteen years can be transferred to the beneficiary’s Roth IRA, regardless of the usual income caps for Roth IRAs. Several guidelines dictate the circumstances of this transfer. First, the beneficiary will still be bound by the yearly maximum contribution limit for IRAs ($6,500 per year in 2023). Additionally, the beneficiary must have earned income that matches or exceeds the amount of 529 funds that will be transferred in a given year. The funds must also have been in the account for at least five years, meaning that the most recent contributions may be ineligible.
Despite the regulations, this new rule significantly expands the eligible uses for leftover 529 funds. It means that some or all of your unused college savings can continue to grow tax-free and jump-start the beneficiary’s retirement savings. This could be a huge boon for parents looking to help their children start saving for retirement early in life to give their money as much time as possible to grow and compound.
Choose a New Beneficiary
You can transfer leftover funds in a 529 plan to another qualifying family member, such as a spouse, child, son- or daughter-in-law, niece, or nephew, without tax consequences or penalties. This is useful for families with multiple children born several years apart who will likely attend college at different times, someone whose spouse may want to pursue a graduate degree or go back to college later in life, or those who want to help other family members with educational expenses. Keep in mind that qualifying educational expenses are not limited to college expenses such as tuition, fees, room and board, and textbooks. In many states’ 529 plans, funds can also pay for private K–12 education expenses, vocational or trade school, registered apprenticeship programs, and up to $10,000 of a beneficiary’s student loans. You can also transfer the 529 plan to a grandchild, but this can incur a generation-skipping transfer tax if the new beneficiary is two or more generations removed from the current beneficiary.
No matter how much you are able to save in a 529 plan or what you choose to do with any excess funds, saving for education can be a wonderful way to improve your family’s legacy and set up yourself and your family for financial success. The financial professionals at Business & Financial Strategies can help you set up a 529 plan for yourself or your family members. They would love to meet with you for a twenty- to thirty-minute in-person or virtual initial conversation about your financial situation and goals, during which they can provide personalized guidance toward achieving your college savings goals and other financial milestones. If you already have a 529 plan, they can help you fine-tune your saving and investing strategies and present options you may not have considered. Additionally, they can help you decide what to do with leftover 529 funds and how to make that money best serve you and your family. Business & Financial Strategies has offices in the Iowa City/Coralville area and in Fairfield, Iowa, and they serve clients all over the United States. To learn more, call 319-358-7700 or visit www.BFSFinanicalPlanning.com to schedule a complimentary initial conversation.