At first thought, having a balance in your 529 plan when your beneficiary finishes college may seem unlikely; however, there is the possibility of certain circumstances that may result in leaving excess funds in a 529 plan, such as:
- winning scholarships
- attending the U.S. military
- attending a relatively lower cost trade school or vocational program
- unexpected gifts or inheritances
- following a different path and not attending college or trade school
If you find yourself in this position, it’s important to understand your options. Here are two strategies that you can speak to your Janney Financial Advisor about to determine how to make the most of your remaining funds.
- Spend-down or transfer funds
- Reposition funds for estate planning purposes
Strategy 1: Spend-down or transfer funds
There are a number of options you may consider in order to spend-down or transfer excess 529 plan funds.
Transfer funds to another beneficiary
- 529 plans allow you to change the beneficiary to another qualifying family member, which includes the beneficiary’s:
- child, stepchild, foster child, adopted child, or a descendant
- parent or ancestor of either, stepmother, stepfather
- siblings or step-siblings
- son-in-law, daughter-in-law
- brother-in-law, sister-in-law
- father-in-law, mother-in-law
- aunt, uncle, or their spouse
- niece, nephew, or their spouse
- first cousin or their spouse
- No taxes or penalties are incurred when changing the beneficiary to a qualifying family member.
- The qualifying family member may use the 529 plan funds to pay for their own continuing education.
- When changing beneficiaries, avoid skipping generations as it could trigger a tax penalty. For example, gifts made by a grandparent to a grandchild (with living parents) may be subject to a flat 40% generation-skipping transfer tax (GST), in addition to gift taxes, if the gift is more than the annual GST exclusion of $17,000 per beneficiary in 2023.
- Be sure to seek the advice of an independent tax advisor based on your particular circumstances.
Use plan funds for your child’s future educational needs
- Keep remaining funds for graduate school or a professional program for your child.
- If your child does not pursue a traditional 4-year degree, you may consider making qualified withdrawals from your 529 plan for trade schools or vocational programs registered with the federal Department of Labor. Use plan funds for student loan payments
- Principal and interest payments toward a qualified education loan is considered a qualified 529 plan expense.
- There is an aggregate lifetime limit of $10,000 per plan beneficiary and $10,000 per each of the beneficiary’s siblings. For example, a family with two children can take out a maximum of $20,000 to pay down student loans.
Take advantage of penalty-free scholarship withdrawals
- If a beneficiary gets a scholarship, attends a U.S. Military Academy, becomes disabled, or passes away, you may take a non-qualified withdrawal without having to pay a 10% penalty on the earnings.
- You may withdraw up to the amount of your child’s scholarship award to spend on anything you like (a non-qualified expense) without penalty.
- However, you will incur income tax on the earnings portion of the withdrawal. So, before you make a scholarship withdrawal, it’s a good idea to see if you can use the money tax-free for other eligible college expenses.
Transfer the remaining 529 balance to an ABLE Account
- Families can make limited annual transfers from existing 529 plans to ABLE (Achieving a Better Life Experience Act) accounts for children with special needs.
- Similar to a 529 college savings plan, ABLE accounts are savings accounts where money can be withdrawn tax-free, but only for qualified disability expenses such as education, job training and support, health care, and financial management.
- Contributing funds to an ABLE account is limited to $17,000 per year per beneficiary. This limit includes transfers from 529 plans and contributions from family members and other sources.
You can take the money
- If none of the above strategies fit your circumstances, and if the taxable impact is minimal, you can take out the money (a non-qualified withdrawal) from the plan and pay the taxes and 10% penalty on the earnings portion of the withdrawal.
- The earnings portion of the withdrawal will be taxed at the beneficiary’s tax rate, which is likely to be relatively low for your child.
- It is worth noting that while you would be paying taxes and penalties for non-qualified withdrawals, you have reaped the immense benefit of tax-free growth over a number of years.
- It is also important to note that your contributions are never taxed or penalized because they were made with after-tax dollars.
Rollover 529 funds to a Roth IRA (Effective in 2024)
- 529 plan owners can make tax and penalty-free rollovers from the 529 plan to the beneficiary’s Roth IRA.
- The Roth IRA accepting 529 funds must be in the same name as the 529 plan beneficiary.
- The 529 plan must have the same beneficiary for at least 15 years.
- Rollovers from the 529 plan to the beneficiary’s Roth IRA are subject to annual Roth IRA contribution limits and a lifetime limit of $35,000.
- 529 contributions or earnings from the past five years cannot be rolled over to a Roth IRA.
Strategy 2: Reposition Funds for Estate Planning Purposes
When most people think of 529 plans they usually do not associate them with estate planning strategies. Here are a few considerations to reposition your 529 balance in support of estate planning goals.
Effectively manage your taxable estate
- A 529 plan is a unique estate planning tool that allows you to reduce your taxable estate and retain control over your assets.
- If you are reluctant to irrevocably part with your assets, you have the ability to take back your hard-earned contributions and earnings from a 529 plan, giving you (the account owner) flexibility to bring the assets back into your taxable estate at any time and for any reason. However, earnings will be subject to income taxes and a 10% penalty.
Bequeath 529 funds to an heir
- You can choose to bequeath your remaining 529 funds to an heir and then continue to make annual tax-free contributions up to the gift-tax exclusion amount ($17,000 for 2023) until you pass away.
- This strategy allows you to retain control of the account and it does not count as part of your estate for estate tax purposes. However, the account value of the 529 plan should not exceed your state’s maximum limit, which typically ranges from $235,000 to $529,000.
Save 529 funds for a grandchild
- Since the value of the plan has already been removed from your estate and there is no time limit on when to spend your leftover 529 savings, grandparents may leave any unused 529 plan money as an educational legacy to their grandchildren.
Working With Janney
Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.
When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.
For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.
This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within. Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
The examples provided are all hypothetical and do not take into account any specific situations. The hypothetical examples are provided to help illustrate the concepts discussed throughout and do not consider the effect of fees, expenses, or other costs that will effect investing outcomes. Any actual performance results will differ from the hypothetical situations illustrated here. Please consult a professional to help you evaluate your situation before implementing any of the strategies discussed here.
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