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Maximizing the Potential of Unused 529 Plan Accounts

Maximizing the Potential of Unused 529 Plan Accounts

September 27, 2023

529 plans have long been a favored vehicle for saving for education expenses. These tax-advantaged accounts offer a variety of benefits, including potential state tax deductions and tax-free growth when funds are used for qualified education expenses. However, life is unpredictable, and sometimes circumstances change, leaving investors with unused 529 plan accounts. Below, we'll explore several strategic options for investors to make the most of their unused 529 plan accounts.

One option for dealing with unused 529 plan accounts is to transfer the funds to another eligible beneficiary. This could be a sibling, cousin, or even the account owner themselves if they decide to return to school or pursue further education in the future. The IRS allows for tax-free transfers between family members, and many states also permit such transfers without any penalties or tax consequences.

If you don't want to transfer the funds to another family member, consider leaving the money in the 529 plan to grow tax-free until it's needed. 529 plans typically have no time restrictions, so you can let the funds sit for as long as necessary. This is a great option if you anticipate upcoming educational expenses, like graduate school or continuing education courses.

While 529 plans are designed for educational expenses, you can still use the funds for non-qualified expenses. However, be aware that if you use the money for non-educational purposes, you'll face income tax on the earnings, plus a 10% penalty. This option should be considered a last resort, but it's better than letting the money go unused.

In recent years, 529 plans have expanded to cover K-12 education expenses. You can use the funds in your 529 plan to pay for tuition and other qualified expenses (up to a $10,000 per year maximum) at eligible private and religious K-12 schools. This option broadens the potential uses for your 529 plan account and can be especially valuable if you have children in primary or secondary education. One caveat to applying distributions towards K-12 education expenses is that not all states are compliant with the recent changes.  If you withdraw funds for K-12 use and live in a state that doesn’t comply with the updates, you could be subject to state tax penalties or your ability to claim credits and/or deductions could be affected. You may also trigger a 10% penalty on non-qualified withdrawals.

Finally, as part of the SECURE 2.0 Act of 2022, starting in January of 2024, there will be an opportunity for an additional type of qualified distribution from 529 plan accounts by allowing rollovers into Roth IRAs.  There are several key provisions of the Act to keep in mind when considering a rollover, including:

  • The 529 account must have been open for more than 15 years
  • The eligible rollover amount must have been in the 529 account for at least 5 years
  • The annual rollover limit is subject to Roth IRA annual contribution limits ($6,500 for 2023; $7,500 for individuals age 50 and older)
  • There is a lifetime rollover limit of $35,000 for each 529 account beneficiary
  • Rollovers can only be made to the Roth IRA account owned by the named 529 account beneficiary
  • Note that Roth IRA income limits do not apply for this type of contribution

Unused 529 plan accounts need not be a source of financial frustration. There are several smart and flexible options for investors to maximize the potential of these accounts. Whether it's transferring the funds to another family member, saving for future educational expenses, or exploring a rollover to a Roth IRA to help kickstart the beneficiaries retirement savings, you have choices.

If you have additional questions about your unique circumstances, please feel free to reach out to our office.  We thought this was helpful information to share with you, our trusted friends and clients, as we all continue to “Move Life Forward.” 

© 2023 Nathan Ollish

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer's official statement and should be read carefully before investing.

Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investment in any state's 529 Plan.