By Stephen W. Bedikian, Associate Wealth Advisor
Now that your kids have completed their education, are you stuck with leftover funds in those 529 accounts you set up for them? Or are you still making use of a 529 but concerned that you might be looking at unused funds in the future? Read on.
Key Takeaways
- 529 plans cover a wide range of educational expenses. Qualified uses include tuition, fees, room and board, books, supplies, and computers, as well as up to $10,000 annually for K–12 tuition and related costs. Careful record-keeping is essential.
- Withdrawing leftover funds can trigger a 10% federal penalty. Account owners can take withdrawals, but the penalty—on top of taxes—can make this option unattractive for large remaining balances.
- SECURE 2.0 created limited Roth IRA rollover potential. Leftover 529 funds may be moved to the beneficiary’s Roth IRA if the account is at least 15 years old, but only up to annual Roth limits and no more than $35,000 total.
- Changing the 529 beneficiary can be a flexible solution. The IRS definition of “family member” is broad, allowing funds to be redirected across generations—making a 529 a potential long-term, multi-generational education resource.
- Overfunding isn’t always a problem with a long view. Because funds can be used for future descendants or extended family, a well-funded 529 can function like a generational education fund.
- Advisors can help determine funding levels and next steps. HH advisors can help determine appropriate contributions for children and grandchildren and explore creative strategies for managing remaining balances.
What is a 529 plan?
529 education savings plans were created by Congress nearly 30 years ago, all the way back in 1996. Over time, assets in these plans have increased dramatically and now total more than $567 billion, according to the Federal Reserve.
Meanwhile, the cost of attending college has grown at a rate far exceeding the overall inflation rate. According to U.S. News & World Report, tuition and fees alone averaged almost $74,000 annually at the ten most expensive colleges for 2025-26.
As a result, many wealthy families have funded 529 accounts with hundreds of thousands of dollars and sometimes more than a million dollars. But what happens if your child chooses not to go to college? Or goes to an affordable state school and has no intention of attending graduate school? Or the expenses are simply turning out to be lower than you anticipated?
What can a 529 be used for?
If you’re still making use of a 529, you should first make sure you use those funds for any and all eligible expenses to help reduce the amount of potential future leftover funds.
Qualified expenses include tuition and related fees; room and board; books and supplies; and computers and equipment. Always keep receipts. And remember that you can’t take a 529 distribution to pay for an expense that is already paid for with a Pell grant, tax-free scholarship or similar program.
As of 2019, you can also use 529 funds to pay for elementary, middle or high-school tuition and other qualified expenses like testing fees and tutoring—up to $10,000 annually.
If you do have leftover funds in a 529 account, they can be withdrawn by the account owner. But there is a federal penalty equal to 10% of the withdrawal amount. Ouch. Potentially paying tens of thousands of dollars in penalties can be a very unattractive prospect for those who have diligently saved and invested that money over many years.
Alternatives to Withdrawals of Leftover Funds—and That 10% Penalty
In the SECURE 2.0 Act passed in 2022, Congress created an option for leftover 529 funds to be used for contributions to the 529 account beneficiary’s Roth IRA. There are significant limitations, however. The 529 account must have been maintained for the beneficiary for at least 15 years. The conversion can only be up to the annual maximum Roth contribution amount ($7,000 in 2025) and total no more than $35,000 per beneficiary. So it will take five years to reach that $35,000 maximum. If the 529 account has a very large balance then this option is only marginally helpful.
The potentially more significant option is the ability to change the beneficiary to any family member of the beneficiary with potentially no tax consequences.* The required family relationship is between the current 529 beneficiary (not the account owner) and the new beneficiary; the IRS’ definition of family member is extremely broad.
New 529 beneficiaries can be related in any of the following ways to be defined as ‘family’:
- a son or daughter or a descendant of either
- a stepson or stepdaughter
- a brother, sister, stepbrother, or stepsister
- a father or mother or an ancestor of either
- a stepfather or stepmother
- a son or daughter of a brother or sister
- a brother or sister of the father or mother
- a son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
- the spouse of any of the individuals described above
- a spouse
- a first cousin
So, in actual practice, a 529 plan can really be thought of as a generational education fund. You’re going to first use it for your own children, but down the road, any leftover funds will grow on a tax-deferred basis and can be used for your future grandchildren’s education. Or even your child’s first cousin! If you take a very long-term perspective, over-funding a 529 account isn’t necessarily a concern. In fact, it may be your intention to do so.
Discuss 529 Plan Strategies with Your Advisor
We welcome you to start a conversation with your financial advisor here at HH to determine an appropriate level for funding 529 accounts for your children and grandchildren—both current and potential. If you’re a current 529 holder looking to wind down your account and seeking ways to work with the remaining balance, we’d be happy to brainstorm solutions with you.
*If a 529 beneficiary is changed to a generation beneath the current beneficiary, it may be considered a gift for tax purposes, so consult with your CPA in advance. Remember that the current federal estate tax exemption is $15 million, so even if it’s characterized as a gift, you can always file a Form 709 and the amount will just count against that very large exemption amount.
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