By Ryan Rink CFP®, ChFC®, CLTC®
How to Handle ‘Leftover’ 529 Balances
Change the Beneficiary
One solution is to switch the beneficiary on the account to pay for another family member’s qualified education expenses. 529 plans permit you to change the beneficiary without tax consequences if the person is a ‘qualifying family member.’ The most common instance of this is another child, but it could also be a sibling, parent, niece/nephew, etc.
Example: Mike and Sally Armstrong have two kids, Alex and John. Mike and Sally have saved $25,000 for each child in 529 plans. If Alex decides not to pursue secondary education, Mike and Sally have the option to change the beneficiary of Alex’s account to John. John would then have the $50,000 available to use towards his education expenses.
Use Towards Student Loan Payments
Another option is to use a portion (or all) of the funds towards student loan repayment. This alternative was recently added with passing of the SECURE Act. The aggregate lifetime limit of qualified student loan repayments per 529 plan beneficiary is $10,000. It’s important to verify that the loan you are paying off is a ‘qualified education loan.’ Qualified education loans can be both federal and private loans, so be sure to double check the rules before paying off a loan.
Example: Let’s assume John went to college at the University of Wisconsin, and Mike and Sally used the entire $25,000 in his 529 account to pay for his education expenses. However, the $25,000 wasn’t enough to cover all of his expenses, so John had to take out an additional $5,000 of federal student loans. If Alex decides not to pursue secondary education, Mike and Sally could use $5,000 from Alex’s 529 account to pay off the remaining student loans for John.
Save for Future Grandkids
A third option is to keep the money invested for the long-term and eventually change the beneficiary to your grandchild(ren). A perk of 529 plans is that the money doesn’t have to be spent within a certain time frame. This can be a great option since this allows the accounts to continue to grow tax-free (assuming they ultimately use the funds towards qualified education expenses).
Example: Let’s assume that neither Alex or John pursued secondary education. The Armstrongs now have $50,000 remaining in 529 accounts. They could choose to wait for either Alex or John to have children, and then change the beneficiary to the future grandchild(ren).
Take a Non-Qualified Distribution
If all of the options above are not available or do not interest you, then you can always take a non-qualified distribution from the 529 account. While the contributions portion of the account won’t be taxed, the earnings will be subject to income tax and a 10% penalty.
Example: We’ll assume again that neither Alex nor John decided to pursue secondary education. The Armstrongs have $50,000 in remaining 529 balances. We’ll also assume that $20,000 of the $50,000 is gain due to investment performance. If they decide to cash out the entire $50,000 and not use it for qualified education expenses, they will be required to pay income tax and a 10% penalty on the $20,000 of gain. $30,000 will not be taxable since these were their original contributions.
If you have questions regarding your 529 accounts, reach out to your Shakespeare Financial Planner for advice.