A 529 Plan is a tax efficient way to save money to pay for qualified education expenses. You can use funds from 529 Plans to pay for Tuition, Books, Room & Board, etc for the listed beneficiary (student) on the account. With the cost of a college education increasing at an alarming rate, you may find it hard to believe that some people have leftover funds in a 529 Plan, but it does happen. So what can you do with these funds without incurring the 10% penalty for non-qualified expenses?
You can transfer the 529 Plan to another beneficiary. This is the easiest option if you have another child who will attend college in the future. As long as you don’t “skip a generation,” you can change the beneficiary to a niece, nephew or even yourself.
Another option is that you can pay up to $10,000 in qualified student loan payments per 529 Plan beneficiary. 529 Plans do not have time limits. Contributions can continue to be made to 529 Plans throughout college and even after graduation. These additional funds can be used to pay down student loan balances.
Effective January 1, 2024, you can transfer 529 Plan funds to a Roth IRA in the beneficiary’s name if the 529 Plan has existed for at least 15 years (note that changing the beneficiary may reset the 15 year clock). You can only transfer up to the $7,000 Roth IRA contribution limit each year (or $8,000 for people 50 and older). Also, there is a $35,000 lifetime maximum transfer limit. Additionally, you can not roll over any contributions (or earning on contributions) made in the last 5 years. Qualifying for regular Roth IRA contributions are subject to annual income limits, but a rollover from a 529 Plan bypasses those restrictions.
The ability to rollover a 529 Plan into a Roth IRA is an exciting new option for unused funds, but these rules are new and still being fleshed out by the IRS. Be sure to look at the latest rulings prior to effecting a rollover.
One last (patriotic) note: If the beneficiary attends a U.S. Military Academy, you can withdraw the estimated cost of attending school from their 529 without penalty.