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What Can I Do with a 529 Plan if My Child Doesn’t Need It?

Author: Jenna-Rose Finnie


During this back-to-school season, parents are covering their children’s education expenses by dipping into the accumulated balances in their 529 plans. These parents who saved for their children’s education costs are benefiting from the tax-free compounding that 529 plans provide.  

Even with the high cost of education, some parents may find that they have excess savings in the 529 plans they have set up for their children. Over-saving, unexpected scholarships, children deciding not to attend college, and the total cost of education being lower than expected are all reasons why this might happen.  

This article describes the options for parents (or other 529 plan account owners) who end up with extra savings in their 529 plans. Before making any decisions, check in with your financial advisor to make sure any actions that you take do not have any negative tax or financial consequences.  


Use the 529 Yourself 

Just because you saved for your child’s education expenses does not mean you cannot use the funds yourself. If your child does not need the 529 savings you set aside for them, this could be a good opportunity for you to obtain an advanced degree, change careers, or obtain a new skill or certification for your current career. Or you could hold the funds until you retire, when you can spend some of your free time learning something new.  


Change the Beneficiary to Another Family Member

As the account owner, you can always change the designated beneficiary of the 529 plan to pay for another family member’s education expenses. There are no income tax consequences if the designated beneficiary is changed to a member of the account owner’s family (see list below). If the beneficiary is changed to a nonfamily member, the transfer would be considered a nonqualified distribution and subject to income taxes and penalties. Consider the power of compounding in a 529 plan initially intended for your child that is instead used by their children/your grandchildren!  

People who are considered members of the account owner’s family:

  • Spouse 
  • Son, daughter, stepchild, foster child, adopted child, or a descendent of any of these family members
  • Son-in-law, daughter-in-law
  • Siblings or stepsiblings
  • Brother-in-law, sister-in-law
  • Father-in-law, mother-in-law 
  • Father or mother or ancestor of either; stepmother or stepfather
  • Aunt or uncle, or their spouse
  • Niece or nephew, or their spouse
  • First cousin or their spouse

Note that gift taxes may apply to transfers to members of a younger generation, such as grandchildren. While the current gift tax limit is the same as the estate tax exemption, $11.7 million per donor for 2021, there have been a few proposals in Congress to reduce this amount.


Room & Board, Rent, and Living Allowances 

For students who are living on campus, qualified education expenses that can be paid for with 529 plan funds include the room and board costs charged by the college or other qualified educational institution. Students living off campus can also count their rent and food (aka board) costs up to the allowance determined by the institution’s cost of attendance, which is published by the financial aid office annually. The expenses for rent and food must be documented like any other expense paid for with 529 plan distributions. Note: Students must be enrolled at least half time to count these expenses as qualified and thus eligible to be reimbursed using 529 plan funds.  


Computer Equipment 

The purchase of computers (desktop or laptop), mice, keyboards, speakers, webcams, headsets, monitors, modems, ethernet cables, software, Wi-Fi extenders, etc. can be reimbursed using 529 plan funds. Expenses related to internet access can be reimbursed too. These expenses have to be related to equipment used primarily by the beneficiary (sorry, no buying a new laptop for Mom or Dad) during a year that the beneficiary is enrolled at an eligible postsecondary school. Any expenses related to computer software for sports, games, or hobbies do not count as qualified expenses. There is a lot of discretion here, but there is no limit on the amount of 529 plan money that can be used for this purpose.  


K-12 Education 

The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified expenses for 529 plans to include K-12 education at private, public, or religious elementary, middle, and high schools. If you have children younger than college age, have grandchildren, or expect to have grandchildren in the future, this may be something to consider. These expenses are limited to $10,000 per beneficiary per calendar year. 


Vocational Schools  

529 plans can be used to pay for postsecondary education at any educational institution that accepts federal financial aid. This includes vocational/trade schools that don’t fit into the traditional four-year college mold. The list of vocational professions is long and includes licensed practical nurse, dental hygienist, chef, real estate agent, HVAC technician, air traffic controller, interior designer, programmer, and heavy equipment operator.  


Apprenticeships 

The SECURE Act of 2019 expanded the definition of qualified expenses for 529 plans to include qualified costs for apprenticeships, including related fees, books, supplies, and equipment. The student must be participating in an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act. Careers that require apprenticeships include solar installer, electrician, pharmacy technician, commercial driver, fire system installer, carpenter, and plumber.   


Repayment of Student Loans 

The SECURE Act of 2019 also expanded the definition of qualified expenses for 529 plans to include repayment of student loans up to a per beneficiary cap of $10,000. This repayment can be made on federal or private student loans of the 529 plan-designated beneficiary or the brother, sister, stepbrother, or stepsister of the designated beneficiary. In other words, since there can only be one designated beneficiary per 529 plan, parents would not have to set up a new 529 plan for their other kids to take a distribution to pay for their student loans.  


What if You Forgot? 

If, after reading this article, you realize that you did not know about a qualified expense that you could have used 529 plan funds to cover, you can take a distribution after the fact to reimburse yourself for the expense. However, the distribution must be made in the same year that the expense was incurred. For example, if you bought a new laptop for your son in January 2021 to be used while he was attending college, you have until December 31, 2021, to take the distribution from the 529 plan in order for it to be considered a qualified expense.  


Roll Over the Account to an ABLE Account 

If your child has a disability, an Achieving a Better Life Experience (ABLE) account may be a good option. ABLE accounts are similar to 529s in that the money can be invested and grow tax-free, but ABLE accounts are specifically designed for individuals with disabilities. As with a 529 plan, the money can be withdrawn tax-free as long as it is used for qualified expenses for the disabled person, such as educational expenses, housing, transportation, assistive technology or services, healthcare, financial management, administrative services, and legal fees. Note: Transfers from 529 plans to ABLE accounts are limited to the annual gift tax exclusion amount, which is currently $15,000. You can learn more about ABLE accounts at the Social Security Administration’s website


Take a Nonqualified Distribution 

If you find that none of the options above are suitable for your situation, you can liquidate your 529 plan; but if you do this, any earnings in the account will be subject to a 10% penalty and federal and state income taxes. It is important to note that this applies only to the earnings in the account and not the contributions made over time. For example, if you contributed $100,000 to a 529 plan and the investments in the 529 plan earned $20,000 while invested, only the $20,000 is subject to income tax and the 10% penalty. 

Earnings are calculated on a pro rata basis with each distribution, and all 529 plan custodians keep track of the earnings related to the remaining balance in the 529 plan over time. With each distribution, some of it comes out as contributions and some of it comes out as earnings. So, if the account was totally liquidated and prior distributions had been made, the final distribution wouldn’t include all the earnings that accumulated in the 529 plan over time.  

There are certain circumstances where the 10% penalty is waived: if the beneficiary dies, becomes disabled (defined as the beneficiary not being able to do any substantial gainful activity because of a physical or mental condition), or attends a U.S. military academy, or if some/all of the beneficiary’s qualified education expenses were used for purposes of the Lifetime Learning Credit or American Opportunity Credit. If the 529 plan beneficiary received scholarships, veterans’ educational assistance, employer-provided educational assistance, or other nontaxable payments (other than gifts or inheritances) for educational assistance, then the penalty would not apply to distributions up to the total of these items. 


Conclusion 

Before making any decisions with regard to your unused 529 plan balance, talk to your financial advisor. There are many different directions you could take with the money that can help you achieve your goals, and it will be important to be strategic to avoid penalties or increased taxes.   


Jenna-Rose Finnie is a Planning Associate at Milestone Financial Planning, LLC, a fee-only financial planning firm in Bedford NH. Milestone works with clients on a long-term, ongoing basis. Our fees are based on the assets that we manage and may include an annual financial planning subscription fee. Clients receive financial planning, tax planning, retirement planning, and investment management services, and have unlimited access to our advisors. We receive no commissions or referral fees. We put our clients’ interests first.  If you need assistance with your investments or financial planning, please reach out to one of  our  fee-only advisors.