Secondary education in America is expensive — there is no doubt about it. But there are some programs in place to help parents or guardians save for college. A 529 plan, the tax-advantaged investment vehicle operated by a state or educational institution, can be a great way to fund higher education expenses. It offers a lot of flexibility as far as how much you can save, who can use the money and what you can do if there are leftover funds after your student graduates.
If you have a lot of money saved in one of these accounts and then your student receives large scholarships or decides not to attend college, you can end up with a surplus, and there are some strings attached. Check out some tips to repurposing leftover 529 funds.
The day after graduation is not when you should be worrying about these funds — unless you can withdraw them for school-related expenses from the past six months. This money will continue to grow tax-free indefinitely, as long as there is a living beneficiary. Another great aspect of the 529 plan is that it is not limited to use on a bachelor’s degree. You never know if you will end up going back to school, so consider letting the account grow while you weigh the pros and cons of returning to graduate degree or working toward a professional degree. This money can be used for tuition and fees, books, supplies and room and board in the future so there is no reason to rush a decision.
Keep It In the Family
If you can be fairly certain the intended student will never be using the money, you might want to consider passing it along. You can transfer any excess 529 funds to another beneficiary at any time by contacting your plan administrator. Even if you do not have kids, you can pass it to a niece, nephew, your parents or even yourself. Most plans allow you to make this change once a year. You can also leave it to a future student such as a grandchild or heir because there are no time limits on when you need to withdraw 529 funds. You can designate who you want control of the account once you are gone and even if you do not make any new contributions, the money will continue to grow tax-free.
Know the Rules
These options can be best if you have done an excellent job planning for not only college education but all other expenses in life. However, if you find yourself in need of these funds for other purposes, you can access them, with a catch. These withdrawals come with a penalty. It’s important to study up on your plan’s regulations so you understand exactly what you will face when extracting the money for uses other than educational. The more you know about the rules, the better you can weigh your options and act. You will likely pay a 10% penalty plus income tax on any gains earned during your 529’s investment period. This may not be worth using for a family vacation but may make sense for paying off high-interest debt.
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