Whether your child is looking at public universities, private colleges, trade schools, or even an apprenticeship program, a 529 college savings plan can offer excellent tax benefits and consistent returns, provided it’s used on qualified expenses. All you have to do is make an initial contribution, then add money over the course of your child’s early years, and the investment portfolio does the rest. Once your kid is ready for freshman year, the funds can go toward a variety of expenses, depending on the plan, including tuition, housing, books, and mandatory fees. However, in certain cases a parent’s 529 plan may be a bit too successful, while in others the funds are no longer needed for one reason or another; when this happens, the question account owners ask is, “What happens to a 529 plan if it’s not used?” To learn the answer, keep reading as the experts at Sootchy discuss this possibility.
What Can a 529 Plan Be Used For?
Because they were first created with the express purpose of helping parents save for their child’s education, 529 plans can only be used for that goal and any expenses related to it. These “qualified distributions” are clearly defined in each plan, and it should be noted that there are some differences between them depending on the state and type of plan.
Prepaid tuition plans carry the most restrictions; funds in one of these 529 accounts can only be used to pay for tuition and mandatory fees, nothing more. College savings plans and ABLE accounts, on the other hand, can go toward a variety of costs related to college, including books, equipment, and room and board. In addition, account owners may put a portion of the funds in the account toward primary and secondary education, student loans, and certain other non-college costs. Whether a specific expense is covered under your 529 plan is hard to say, so be sure to check with the plan’s administrator before taking out any money.
Should you use funds from a 529 account for any purpose other than what’s outlined in the plan itself, expect to pay a penalty on any earnings you withdraw. Typically, this penalty takes the form of income tax – federal as well as state – along with a 10% fee, seriously putting a dent into any returns you intend to spend. Unfortunately, these restrictions and penalties apply to 529 funds even if your child is no longer attending college or has already graduated, so your options are limited if any money in your 529 plan is not used.
What to Do If Your 529 Plan Is Not Used
With few exceptions, winding up with money you didn’t expect is a surprise anyone would welcome, whether it’s in a 529 plan or not, but the limitations on these plans can force account owners to find creative ways to put those funds to use. That said, there are a few circumstances in which a person can withdraw the money if their 529 plan is not used without having to worry about paying the usual 10% penalty; we’ll cover each of these points below.
What Happens to Unused 529 Plans?
If you are a parent whose well-tended 529 plan was not used, know that the status of those funds doesn’t change simply because they’re no longer needed. If your child got a full ride somewhere or paid for college without using up all the money in the account, it may seem like there’s not much you can do with that leftover cash. However, account owners can still use those funds by taking advantage of one of the following options:
- Change the beneficiary of the account to another child, your spouse, or yourself, and that individual can use those funds to cover qualified education expenses instead.
- Roll over the funds into an ABLE account, at which point they can be used for more than just education costs.
- Save the funds for future educational pursuits, such as attending law school or earning a graduate degree.
- Take the hit on your earnings and withdraw the funds anyway.
Should you decide to save the money in your 529 plan for some undetermined future use, remember that the account won’t suddenly expire after some period of time, so there’s no rush to decide how to use it. In fact, taking your time could actually pay off, since the account will continue to generate returns.
Exceptions on Use of 529 Funds
Although the list of ways to spend unused 529 plan funds may be short, there are a few exceptions under which you may be able to take earnings out of the account without being penalized. If one of the following events occurs, you’ll be able to use your 529 funds as you see fit, provided you pay income tax on any earnings:
- The beneficiary receives a scholarship.
- The beneficiary attends a military academy.
- The beneficiary passes away.
- The beneficiary becomes disabled due to injury or illness.
- The non-qualified distribution is tied to the American Opportunity Tax Credit or Lifetime Learning Tax Credit.
Contact Sootchy to Sign Up for a 529 Plan Today
Preparing for your child’s future is an important part of being a parent, whether college is in the cards or not. If you think your child will end up pursuing higher education, attending an expensive private elementary or secondary school, or taking up a trade that involves an apprenticeship, they can almost certainly benefit from a 529 college savings plan. Learn more about these options, including the benefits they can offer your family, by visiting Sootchy online or downloading our app today.