The 529 Account is an Educations Savings and Investment Account. Any money you contribute is tax deductible and the money grows tax free as long as you spend it on qualified educational expenses like tuition, school supplies, dorm rent, or even a laptop. Read all about the 529 Account on my blog post Saving for College with a 529.
Now let’s work on answering the question in the title of this post. What happens with the money left over in the 529? Do you get taxed or penalized if you don’t use it? You basically have three options when it comes to the 529.
Option 1 – Withdraw the Money
If you are sure you will never use your 529 Account to pay for educational expenses, you can withdraw the money and pay a 10% penalty on the earnings portion of your withdrawal. You will also need to pay federal income taxes and in some cases, state income taxes. Depending on the state you live in, you may also be charged a state penalty fee.
Option 2 – Use it for Grad School
If you are your child might attend grad school in the future, then leave the account alone. Be sure to contact your 529 Account holder as some 529 Accounts may have a time limit of when funds should be used.
Option 3 – Change the Beneficiary
For the third option, you can simply change the Beneficiary to a qualified family member. If the 529 Account belongs to you and you are finished with it, transfer it to your spouse or your children. If your oldest child is finished with it, change the beneficiary to your second child, and so on. If you are willing to pay a penalty and taxes, you can name a beneficiary outside of your family.
If you’d like to join a new 529 plan, you have 60 days to rollover your distribution from your existing 529 plan to a new 529 plan with the new beneficiary.
How Much Should You Save?
Unfortunately, the 529 Account will not behave like the similar HSA (Health Savings Account) where the leftover funds at retirement will be treated as if it were in a Traditional IRA account. If you save too much in the 529 plan, you may end up with extra money that you will be penalized for if you want to withdraw it. If you save too little, you won’t have enough to pay for college. In my opinion $200,000 per student is a good target for most people who save with a 529 Account. It may not be enough to fully pay for an ivy league or private school tuition, but it will get you close enough and will cover the full tuition of most public universities. After all you never know where life will take you or your children. Want to open a 529 College Savings Account? Try Wealthfront, a long term investing company offering IRA’s, checking accounts, and more. You can also shop around any state’s 529 account since you don’t have to live in that state to open a 529 account with them.
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