Excess 529 Money…hmmm, what to do?

Jul 27, 2020

You diligently saved to a 529 account over the years and watched the balance grow. Now the beneficiary of that account has graduated from college – congratulations! Looking at the latest statement, you see that their 529 account still has a balance. What should you do with that money? Importantly, what can you do with that money?

Is Grad School on the Horizon?

If the recent grad is considering graduate school, it may make sense to leave the account as is. Depending on their time horizon, you might want to invest the account more aggressively – most accounts are very conservatively invested while the beneficiary is in school to avoid large drops in value right when you need the money the most. Odds are the residual balance won’t be enough to cover the full cost of graduate school, but every little bit helps. You can also continue to make contributions to the account if you wish – a very attractive option for Indiana residents due to the generous state tax credit available.

Repurpose for a Younger Sibling

If you have other children planning to attend college, you can make one of them the beneficiary of the 529 (an account can only have one beneficiary at a time). There are no penalties or tax consequences for making this change. This is very helpful if the younger sibling does not have enough in their 529 to cover their college expenses. Once the change is made, you may pay qualifying college expenses for the new beneficiary from the account.

Widening the Net

If there are no siblings that need the money, you can look further out on the family tree. The list of qualified family members to whom a plan beneficiary may be changed is quite extensive (parents, grandparents, aunts, uncles, nephews, nieces, first cousins, etc.). Just like with siblings, switching to a qualified family member entails no taxes or penalties.

Thinking Longer Term

If none of these options are appropriate, you can leave the account in place to eventually change the beneficiary to a grandchild. A 529 account cannot have an unborn child as the beneficiary, but you can change the beneficiary once the child is born. You can leave your child as the beneficiary for now and change when and if the birth occurs. Again, you will likely want to alter how the account is invested – an unborn child has a pretty long time horizon before the funds are needed, so you can be more aggressive.

Show Me the Money!

If you personally need the money, you can withdraw some or all of the balance. Since this would not be for a qualified education expense, there are consequences. The withdrawal would be subject to income taxes and an additional 10% penalty. The taxes and penalty only apply to any earnings in the account; any return of principal is neither taxed nor penalized.

For example, let’s say your child’s 529 account has $10,000 left in it. The $10,000 consists of $4,000 in contributions and $6,000 in earnings. If you withdraw the entire amount, you would owe taxes plus the 10% penalty only on the $6,000 of earnings. Depending on your situation, that might be worth it.

Summary

Having money left over in a 529 account may be viewed as a problem, but it is a problem most of us would love to have!

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Please remember that past performance may not be indicative of future results. Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.

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