If your child doesn't go to college — or if some other situation arises — you have two options for unused funds in a 529 college savings plan. You can:
- Pay education expenses for other beneficiaries, or
- Withdraw the money from the account entirely (which may prompt additional taxes)
You can fund education for other beneficiaries or withdraw the money entirely.
Withdrawals from a 529 plan for qualified higher education expenses are free from federal (and possibly state) income taxes.
How do I name a new beneficiary for a 529 plan?
It's as simple as changing the name of the account's beneficiary to someone else in the same family — one of your other children, or a first cousin, perhaps. Under the new tax law, up to $10,000 per year can be used for elementary or secondary education. So you might want to name a grandchild as the new beneficiary. You could even name yourself and use the funds for training, either in your current career or as a way to begin a new one.
You can now use up to $10,000 per calendar year per beneficiary in 529 assets to help pay for tuition in connection with enrollment or attendance at an elementary or secondary public, private or religious school.
What if I decide to close the 529 account?
Should you choose to close your 529 plan and take the money out of it, be aware that withdrawals for purposes not related to qualified expenses are subject to ordinary federal income taxes — and potentially a 10% percent additional federal tax.
But what if my child gets a scholarship?
There is a limited exception to the rules regarding unused 529 funds: If your child receives a college scholarship, you may withdraw an amount equal to the scholarship from the 529 plan without incurring the 10% additional federal tax. Instead, you pay the standard income tax and are free to use the money as you wish.