If your child doesn't go to college, receives a scholarship or if some other situation arises where you have excess funds — you have the following two options for using the leftover amount in a 529 education savings account.
Transfer or roll over the funds
529 education savings plan accounts can be transferred from one beneficiary to another eligible member of the family or rolled over into other 529 accounts for the same beneficiary or an eligible family member. But, there are certain limitations:
- Changes in beneficiaries are allowed free from federal (and generally state and/or local) income taxes — only among certain members of the beneficiary's family.
- Only one income tax-free rollover of a 529 to a 529 for the same beneficiary is allowed per 12-month period.
- Rollovers to ABLE accounts (tax-advantaged savings accounts available to benefit those who are disabled) are permitted, subject to ABLE contribution limits.
- Rollovers from a 529 plan to retirement plans (such as an IRA) are not allowed.
- You cannot change the beneficiary of a 529 account funded with custodial assets.
Can I transfer a 529 plan to another child?
With 529 plans you can change beneficiaries without negative income tax consequences — if, say, the original beneficiary decides not to attend college or receives a scholarship and doesn't need some or all of the funds — as long as the new beneficiary is a member of the original beneficiary's family. [Qualified family includes the beneficiary's siblings (including step), parents, children, first cousins, nieces and nephews, among others.] It really is as simple as it sounds. You just change the name of the account's beneficiary to someone else in that person's family or transfer a portion of the assets to the other beneficiary's 529. This is not the case, however, for 529 plan accounts funded with custodial assets, also known as UGMA or UTMA accounts, assets — which are considered an irrevocable gift and, therefore, the beneficiary cannot be changed by the UGMA or UTMA custodian. They differ from non-UGMA/UTMA funded 529 accounts in that the funds are invested on behalf of minors who become owners of their accounts once they come of age.
Can I transfer between multiple 529 accounts or into another state's 529 plan?
When it comes to rollovers, the IRS rules allow one income tax-free rollover of one 529 account into another for the same beneficiary within a 12-month period. Two reasons you might consider a rollover:
- You've moved and your new state offers a tax deduction for contributions to qualifying in-state 529 plans,Footnote 1 or
- You want to consolidate multiple 529 accounts into 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.
You can't, however, roll a 529 plan account into an IRA or any other retirement plan. If you have extra funds in a 529 plan account that you don't want to transfer to another beneficiary, you might name yourself as the beneficiary and use the funds for your own future education. Or, you could close the account and take a non-qualified withdrawal. But, if you do so, bear in mind that if you're withdrawing funds for purposes other than qualified education expenses, the earnings portion of those withdrawals are subject to federal income taxes — including, potentially, a 10% additional federal tax as well as state (and/or local) taxes.
Withdraw the funds
You can withdraw the money from the 529 education savings account entirely (but 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). The 10% additional federal tax is waived for withdrawals up to the amount of scholarships received and in the case of death or disability of the designated beneficiary.
How do I name a new beneficiary for a 529 plan?
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.
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. The 10% additional federal tax is waived for withdrawals up to the amount of scholarships received and in the case of death or disability of the designated beneficiary.
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.