By Christian Hudspeth, CFP®
Whether it’s because your child landed scholarships or they changed their mind about higher education, there are plenty of good reasons why there’s leftover money in their 529 plan.
So, what is the best thing to do with unused 529 funds?
Many people think the answer to this question simply revolves around avoiding taxes and the 10% penalties on non-qualified withdrawals.
That’s part of it. But it’s more important to think about how your decision may fit into your family’s future goals. Here are some additional questions you might ask yourself:
- Could our adult child need financial help with education again?
- Could we alternatively help them build a long-term financial foundation?
- If not this adult child, could we help fund another family member’s education?
With your family goals in mind, here are three creative ways to effectively use your 529 plan(s) toward building a better – and more educated – future for your family.
Option 1: Keep it for your adult child’s future education
If you don’t need the money, it’s not a bad idea to keep your tax-sheltered 529 plan funds in place for your child.
As Congress continues to expand the list of “qualified expenses” for 529 plan beneficiaries, there will be more potential uses for those dollars in the years ahead. For example, the 2026 OBBBA tax law changes allow tax- and penalty-free spending for:
- Instructional books and online courses,
- Workforce training and continuing education courses, and
- Trade schools and credentialing programs (e.g. education toward a CPA or CFP designation).
Meanwhile, with the 529 being properly managed, the investments inside can compound tax free each year, much like a Roth IRA built just for education.
Option 2: Give them a tax-free retirement (rolling leftover 529 money to Roth IRA)
If education isn’t a future goal anymore, you can use the 529 plan to essentially gift your child a tax-free retirement thanks to a relatively-new 529 rollover feature we talked about in 5 Secure Act 2.0 Tax-Law Changes Ahead.
There are some rules to adhere to, but essentially if you opened the 529 plan 15 years ago or longer, and it’s been five years since contributions, the beneficiary may perform 529 plan-to-Roth IRA rollovers over several years, up to a $35,000 lifetime limit.
At a 10% average annual return, $35,000 invested within a Roth IRA at age 30 could grow to nearly $1 million by the time they turn 65. And that comes with tax-free retirement withdrawals too.
Option 3: Use it toward another relative’s education (transfer to a sibling or relative)
Want to spread the wealth to more family? A 529 plan account holder (the person who originally started the account) can flexibly change the 529 beneficiary at any time, and even multiple times, to another member of the current beneficiary’s family.
You could change the beneficiary to their sibling, your niece/nephew, a grandchild, your spouse, or even to yourself. The relative doesn’t have to be blood-related either – “in-laws” count too.
Even newly-named beneficiaries who aren’t in college yet can benefit from the following qualified expense withdrawals:
- K-12 private schooling tuition up to $20,000 per year
- Tutoring, standardized test fees,
- Dual-enrollment fees for high school students taking college courses,
- And of course, their own future college
If the current 529 plan beneficiary has siblings with student loan debt, you can use the 529 funds to pay up to $10,000 off the sibling’s balance.
Thinking Beyond
The three options above are excellent if you already know which family members could use your financial help now or even a few years into the future.
But if they’re covered as far as you can see, ask yourself the following:
- What role do I want education to play in our family decades from now?
- How can I help my family get the education for and seize the future career opportunities that no one even knows about (yet)?
- If I were to leave behind hundreds of thousands of dollars, do I want my children and grandchildren to use my life savings with discretion? Or with purpose?
If you want to put purpose behind the money you leave behind for your family, there’s a way to use 529 plans to give the gift of higher education for your born and not-yet-born grandchildren, and with no expensive trusts required. This is a big planning idea we’ll talk about next time in our series on unused 529 funds, so stay tuned.
Seeing around the financial corner
Your financial future is bigger than a single decision to avoid taxes and penalties on 529 plan withdrawals. It’s a family decision that takes some thought around how it fits your broader financial and legacy goals.
So when you’re ready, we’re ready to help you think through it. Reach out to the author, Christian Hudspeth, CFP® at chudspeth@fmpwa.com to get the conversation started.
Further reading on 529 Plans:
529 Plans Vs. One Great Alternative – FMP Wealth Advisers
How to Change a 529 Beneficiary: Rules, Steps & Tax Implications
529 Qualified Expenses: What Can You Use 529 Money For?
529 Plans: Questions and answers | Internal Revenue Service
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
