529 Plans: Smart Ways to Make Use of Leftover Funds

By Martial Frindethie, Chief Operating Officer

In an earlier blog post, I shared my thoughts on an important education savings tool: the 529 Plan, which is a tax-advantaged savings plan designed to encourage saving for future education costs.

Now I’d like to explore what happens if you find yourself with leftover 529 funds. While it seems like a good problem to have, it’s not as uncommon as you might think. A student could get a scholarship, find that tuition was cheaper than expected or receive unexpected funds from gifts or an inheritance, leaving them with more money than they need to pay for their education.

If you have leftover 529 plan funds, and you want to maximize the value of your savings while minimizing the impact of potential penalties, there are several options.

Options for Using Leftover 529 Funds:

Use for Qualified Education Expenses: You may use funds for more education-related expenses that you might realize. In addition to tuition, these include room and board, fees, books, supplies, computers, internet access and certain types of equipment. See my earlier blog post 529 Plans How You Can and Can’t Use Them. for a more detailed list of qualified expenses and their descriptions.
Use for Other Education Expenses. You could pay for graduate school (e.g., an advanced degree or professional program). Or even use up to $10,000 per year for private elementary or secondary education.
Transfer to Another Beneficiary: One of the great things about 529 plans is that they allow you to change the beneficiary to another qualifying family member without tax consequences.
Pay Student Loans: You can pay up to $10,000 in qualified student loan repayments each per 529 plan beneficiary and their siblings (brother, sister, stepsiblings). A 529 plan savings account owner may change the 529 plan beneficiary at any time without tax consequences.
Withdraw with Penalty: If none of the above options fit, you can withdraw funds, but you'll incur taxes on the earnings and a 10% penalty.

Roll Over Funds into a Roth IRA. The SECURE Act 2.0 allows unused 529 funds to be rolled over into a Roth IRA for the 529 beneficiary without incurring penalties or taxes, which could then boost retirement savings. To qualify for a transfer, you must maintain the account for at least 15 years, and the amount you must have contributed the amount you transferred at least 5 years prior. The Roth IRA also must be that of the 529 account’s designated beneficiary.

Criteria for 529 to Roth IRA Rollovers:

Beneficiary Requirement: The 529 plan must be in the beneficiary's name.
Account Age: The 529 plan must be at least 15 years old.
Annual Contribution Limits: Rollovers count towards the annual Roth IRA contribution limit (e.g., $6,500 for 2024).
Lifetime Limit: There is a lifetime rollover limit of $35,000 per beneficiary.
Contribution Restrictions: Contributions and earnings made in the last five years are ineligible for rollover.
Income Limits: The beneficiary must have earned income within the IRS limits for Roth IRA contributions.

Questions? Please Reach Out

Education funding and planning advice is complementary for our clients, and I’d be very pleased to explore leftover 529 plan fund options in more detail with you. I’d also be glad to introduce and help you with College Aid Pro™, a powerful college planning tool that simplifies financial aid, helps families maximize scholarships and grants, and guides students toward the most affordable schools—so they can graduate with less debt and more financial freedom.

If you have questions about this or other education funding and planning matter and want to set up time to talk, please contact me.

For more on education funding and planning, please check out my previous blog posts 529 Plans How You Can and Can’t Use Them., Four Things I Wish I Knew Before Applying to College, Financial Aid 101: What Families Need to Know Before They Apply, and The FAFSA Simplification Act: What It Means for Your Student Financial Aid Needs.

On a semi-regular basis, I’ll be sharing more blog posts on education savings plans and how families can evaluate options and plan ahead for tuition costs.

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