Funding a 529 plan is a great way to pay for college. With the high costs of higher education, it is difficult to imagine that there actually might be some cash leftover in a 529 plan after paying for college!
But it does happen. Perhaps your child received scholarships or other school aid. Grandparents or other relatives may have provided unexpected support. Maybe your child attended a lower cost school. So now what?
Here are some options of what to do with leftover college savings………………………..
Save it for Grad School:
A 529 plan is not limited to use on receiving a bachelor’s degree.
On graduation day, the student may not even know if he or she wishes to purse a graduate degree or a professional degree (such as law). The 529 plan can be used for tuition and fees, books, supplies and room and board at any time in the future for such post-secondary education. There is no reason to rush a decision.
Change the Beneficiary:
There is no tax consequence to changing the beneficiary to another blood relative. This provides the flexibility to help another child who with schooling needs or perhaps even a niece or nephew, cousin or grandchild.
A 529 plan can also be used for eligible vocational or technical training school for a variety of trades such as automotive, hairstyling, and IT.
Parents interested in their own education can even make themselves the beneficiary. A 529 plan can be used for many courses at most community colleges, for example, and perhaps even some outdoor or other recreational education programs.
Parents may also wish to switch the beneficiaries to themselves to maintain control.This is a good tool if there is no immediate need for the unused funds or if the need is unclear or unknown; one can always switch the beneficiary down the road.
Just keep in mind that beneficiaries can be changed only once a year.
Use the Scholarship Exception for Penalty-Free Withdrawals:
One can withdraw from a 529 account without paying the 10% federal tax penalty for amounts up to any scholarships that the account beneficiary receives. Federal (and perhaps state income taxes) are owed on the earnings portion but the contributions can be withdrawn tax- & penalty-free. Caution— the tax rules regarding this are vague.
You could just withdraw the leftover 529 plan cash and spend it on any whatever you would want. This is not the most sensible option! You will have to pay federal income tax, and an additional 10 percent penalty on the earnings portion of the withdrawal. You may have to pay state income tax as well.
Congratulations to the college students for graduating AND congratulations to the parents who did not break the bank in the process! John Kasperek wanted to provide these 529 Plan tips during the graduation season to help people plan the next step.