Published February 24, 2017|6 min read
With all this talk about never having enough money saved up, it almost doesn’t make sense to think about having too much money as a problem. Is there even such a thing as having too much money?If it’s about 529 college savings funds, then yes.With a 529 plan, you have a dedicated account with money saved up to pay for various college costs that loans or financial aid may not cover completely. 529 plan earnings are tax-free and can be used for anything from books, school supplies, tuition or room and board. You can only use 529 funds for specified educational purposes, or a 10 percent penalty fee may apply.According to financial experts, depositors often overestimate how much college will cost, and how much they’ll need to sock away in their 529 savings plans. There’s no way of initially knowing how much you’ll need to save, since your beneficiary -- a son, daughter, grandchild, niece or nephew -- might earn a scholarship or receive other 529 gift money from additional family members.When this happens, you might end up with a surplus of tax-deferred 529 dollars. So what, and how do you do with the leftover money without any negative tax ramifications?There’s no time limit to when you can withdraw funds from a 529 plan, just like there’s no "use it or lose it" type of rule that says you must withdraw contributions by a certain or else pay a penalty -- unlike, say, an IRA, where you’ll be penalized if you don’t start deducting from your account at age 70 ½. Keeping your funds right where they are is one way to let interest go to work for you. A 529 savings plan is a savings plan, after all, and the whole point is to let it grow. If you’re looking for a reason to withdraw, it’s probably a good idea to sit tight and let the money build on its own … tax-free, of course.Here are some other ways to make the most out of your unused 529 savings fund:
Your best, most practical and financially sound bet is to first look for any way you can use those 529 dollars towards other qualified expenses. Remember, A 529 savings plan isn’t only for tuition costs, textbooks and school supplies; you can put the money towards expenses associated with one’s major (like lab fees), or residential fees, like room/board/dorm costs. The money is good to pay for off-campus student housing, as well.Computers and related equipment (like access to an internet plan) are also higher-ed-qualifying purchases, but be careful on this one; smartphones and mobile devices may not qualify.
529 plan beneficiaries aren’t set in stone. If one beneficiary doesn’t use a portion of money you’ve saved for them, you can transfer the funds to a new beneficiary. You can select anyone to be your beneficiary, but if they’re not a qualified family member, like a parent, spouse, child, sibling or cousin, or if you skip generations, there could be tax implications involved.You’re also permitted to name yourself as your own 529 recipient, you never know what educational venture might arise down the road. You could pursue a master’s degree in a few years, or go back to school for an unexpected, unplanned career change. Those 529 plan dollars can come in handy when just a few years prior they were unused.Rolling over the funds to a new beneficiary isn’t as seamless as if you transferred money from one bank account to another. You’re only allowed to switch beneficiaries once a year. Since 529 plans are largely state sponsored, there could be some state tax implications, as well, depending on where you live, so check the laws on your state’s website. For instance, you may owe taxes if you roll over 529 funds while living in a state other than the one you saved the money in.
You can hang on to your 529 savings and pass it on to future members of your family, like grandchildren who haven’t been born yet. Apart from the tax benefits attached to a 529 plan, there’s also no time limit to when you can withdraw. Your next beneficiary could be born this year, and if they won’t start college until 2035, you can hold tight to your funding (and keep contributing) for the next 18 years without any problems.The key to keeping your funds on hand for someone else is to name yourself as the beneficiary and then name a new recipient when the time is right. When you’re writing a will, including your 529 plan on the record is one way to earmark the funds for future heirs while excluding the funds from the rest of your taxable income. Under current guidelines, you can contribute up to $14,000 to a 529 plan -- double that for couples -- without having to pay a gift tax.
One way to withdraw unused money from a 529 account to use to your heart’s delight -- without getting taxed -- is if your beneficiary receives a scholarship and the college savings money isn’t needed. It’s one way to avoid getting penalized by Uncle Sam, though you’ll still need to pay taxes on any dividends raised in the account. In this case, you can make a withdrawal up to the amount of the scholarship.Other valid ways to make non-education-qualified withdrawals from your 529 account include:
If a beneficiary passes away (like student loan debt, your obligation is forgiven in this circumstance)
If a beneficiary becomes disabled
If your beneficiary is accepted to and attends an official military academy or college
As always, these rules apply if you are your own beneficiary on the account.
If you’ve exhausted all your options, there are no beneficiaries lined up, nobody in your family is college bound, or anyone who is, is poised for a full-ride scholarship, there’s no use keeping an active 529 account. So take the money, use it for something completely different, and don’t worry about qualified educational expenses, or paying penalties.Is there a way to keep it educational, even if it doesn’t qualify? Using the money to pay for a trip or vacation with a strong learning theme is one way to justify a 529 withdrawal. Bettering yourself in any way, like spending money to enroll in a cooking class, or paying down existing student loan debt, are ways to enrich yourself personally and financially while devoting your dollars to something education-related. You’ll still need to claim earnings on the account as taxable income and pay the standard penalty, but hopefully the reason you spend the money will be lessen the financial impact.Remaining dollars in your 529 account funds don’t have to be wasted. They can be repurposed and reused with minimal impact to your finances, if any at all. Passing them onto someone else, using the money yourself, or simply letting the investment build are all educated, financially literate efforts that make saving for college worth even more in the long run.
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