If your child doesn't go to college — or if some other situation arises where you have excess funds — you have two options for using the leftover amount in a 529 education savings account. You can:
- Transfer or roll over the account to pay qualified education expenses for other beneficiaries (including yourself or other family members of the beneficiary)
- Withdraw the money from the 529 education savings account entirely (in which case the earnings portion of the withdrawal, if any, will be subject to federal income taxes, and possibly state and/or local taxes, and potentially a 10% additional federal tax).
You can fund education for other beneficiaries or withdraw the money entirely.
Withdrawals from a 529 account for qualified higher education expenses are free from federal (and possibly state and/or local) 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 beneficiary's family — one of your other children, or a first cousin, perhaps. In addition to college expenses, up to $10,000 per year per beneficiary from all 529 accounts can be used to pay for the beneficiary's tuition in connection with enrollment or attendance at an elementary or secondary, private, public or religious school. 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.
What if I decide to close the 529 account?
Should you choose to close your 529 account and take the money out of it, be aware that the earnings portion, if any, of withdrawals for purposes not related to qualified expenses are subject to ordinary federal (and possibly state and/or local) income taxes — and potentially a 10% additional federal tax.
But what if my child gets a college scholarship or grant?
There is an 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 account without incurring the 10% additional federal tax. Instead, you only pay the ordinary federal (and possibly state and/or local) income tax on the earnings portion of the withdrawal, if any, and are free to use the money as you wish.