Congratulations on meeting your savings goal to fund a child's college education! However, there may be situations where you have leftover money in your college savings account. This could be due to your child pursuing a different career path, receiving scholarships, enlisting in the armed forces, or completing college early.
But don't worry, you don't have to forfeit that money! As the account owner, you have several options:
- Use the money for tax-favored expenses: It's always wise to use as much of the money as possible to pay for qualified expenses. These include not only tuition but also student fees, books, supplies, required equipment, a computer, software, and certain room and board expenses.
- Change the beneficiary: You can transfer the account to another family member without incurring any fees or taxes. Eligible family members include spouses, children (including stepchildren, foster children, and adopted children), in-laws, siblings, and more. You can also use the funds for private K-12 education expenses for these relatives. However, be cautious about skipping a generation, as it could result in a tax penalty. If you want the funds to benefit a grandchild, you can transfer ownership of the account to your child, who can then name your grandchild as the beneficiary.
- Save for future educational needs: If your child may pursue a graduate degree or professional program in the future, you can leave the funds in the account to accumulate and be available for their return to school. Vocational and technical schools are also eligible post-secondary institutions.
- Pay down student loans: Thanks to the SCURE Act, you can use up to $10,000 from the account to pay off the beneficiary's student loan debt. You can also allocate $10,000 per sibling towards their student loan debt. However, note that the portion of student loan interest paid with tax-free 529 plan earnings is not eligible for the student loan interest tax deduction.
- Use the money for other purposes: If none of the above options suit your needs, you can withdraw the money and use it for any purpose. Keep in mind that earnings on the account will be subject to income tax, and you'll incur an additional 10% penalty if the money isn't used for qualified educational expenses. However, the initial contribution made after taxes won't be taxed again.
You have a range of options available to make sure that your hard-earned savings are put to good use. By exploring these options, you can maximize the benefits of your 529 savings plan and ensure that your savings continue to support educational pursuits and financial well-being. Cheers to your prudent financial planning!
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