How to handle unused 529 funds

Bill Engel in Wealth Management 5 August, 2016

piggy bank graduateThe rules and regulations surrounding how 529 plan money can be used, are important to understand. While we believe that these plans offer a good option for college funding, failure to comply with guidelines associated with the plan can lead to penalties.

529 plan earnings grow federal tax-free and are not taxed when the money is taken out and used for qualified higher education expenses. Many states also offer state tax deductions, making these plans one of the most efficient ways to pay for a child’s college education.

We do however caution our clients not to overfund the account. Today, there are a number of alternative options to paying for college (loans, grants, etc.) and there are penalties when you use 529 plan funds for non-qualified expenses. Careful calculation should go into making projections for the account in order to prevent over funding. Talk to a financial advisor to see how to properly allocate.

When there is money left over in a 529 plan or if a child decides not to pursue higher education, we recommend the money is not removed from the account for other purposes. You will incur a hefty penalty. Instead, let the money grow tax-free. There are no requirements stating when the money needs to be withdrawn. You are permitted to change the beneficiary once a year, so you can name a sibling, or wait until you have grandchildren who might use the funds. You can also consider using the money to further your own education.

In the end, 529 plans offer a great way to save, but proper planning to maximize the benefit is key.

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