A 529 plan is a tax-advantaged investment account specifically designed to help families prepare for future education expenses. However, it is not uncommon for families to find themselves with leftover 529 funds after their child graduates. Whether it’s due to scholarships, receiving unexpected gifts or inheritance from relatives, better-than-expected investment returns, and/or attending a less expensive school than originally planned, having excess funds in a 529 plan is not a rare occurrence. Fortunately, there are several options for families to put those remaining funds to good use.
While careful planning can help align education savings with future expenses, having excess 529 funds is not uncommon; several strategic options are available to support broader financial goals, benefit other family members, and/or contribute to a lasting educational legacy.
Option 1: Use the Funds for Graduate School or Continuing Education
One straightforward way for a beneficiary to utilize excess 529 funds is to apply it toward graduate school or other forms of continuing education at a later date. These funds can be applied to qualified educational expenses that go beyond undergraduate tuition, such as:
- Professional training and credentials including costs for skilled trades and vocational training.
- Certain room and board expenses such as on- and off-campus housing costs if incurred during the academic period in which the student was enrolled at least half-time or accepted into a degree, certificate, or other programs that leads to an educational credential.
- Books and supplies, including textbooks, laboratory resources, safety equipment, and other mandatory items that are required for completion of coursework.
- Computers and software for educational purposes as long as the beneficiary primarily uses that hardware while enrolled in an eligible institution ( which is an institution that participates in the U.S. Department of Education’s student aid program). Apps related to a hobby such as computer games or sports software are not eligible.
Option 2: Change the Beneficiary
If the original beneficiary has completed their education, the remaining 529 funds can be transferred to another family member who is planning to attend college. The Internal Revenue Service (IRS) deems qualified family members to include siblings (including those who are adopted), cousins, nieces or nephews. Alternatively, if a parent or custodian wishes to pursue higher education using the original beneficiary’s excess funds, they can change the beneficiary to themselves. This multi-generational education planning tool allows families to preserve the tax-advantaged status of the account while reallocating the funds to other family members.
To maintain the continuity of the account, it is important to designate a successor owner. This ensures that the 529 plan remains active in the event of the original account holder’s death or incapacity. Of course, the 529 plan trustee could just continue to invest the capital to be used for future generations as well.
Option 3: Roll the Assets over to a Roth IRA
The SECURE Act 2.0, a Federal law focused on retirement savings that took effect in January 2024, currently allows for unused 529 funds to be rolled over tax-free and penalty-free into the beneficiary’s Roth IRA with certain conditions1:
- The 529 account must be open for at least 15 years.
- The beneficiary of the 529 account and owner of the Roth IRA must be the same person.
- The amount of the rollover is limited and subject to Roth IRA annual contribution limits with a $35,000 lifetime limit.
The statute contains several gray areas that are open to varying interpretations. If you change the designated beneficiary, as mentioned above, it’s likely that the 15-year holding period will restart. Contributions and earnings on those contributions made within the last five years are ineligible for rollover. The new beneficiary must have earned income equal to or greater than the amount being transferred in any given year to satisfy Roth IRA contribution rules. Finally, certain states may not consider distributions as a qualified expense for state income tax purposes.2 As a result, it is important to consult with a qualified tax advisor prior to initiating such a Roth IRA rollover.
Option 4: Fund Private K-12 Education or Student Loan Repayment
If you are looking to use the funds sooner rather than later to avoid being left with excess funds later, 529 plans can be used to pay for up to $10,000 per year in K-12 tuition.3
This provision was introduced through the Tax Cuts and Jobs Act of 2017. However, state laws do not always align with Federal rules. There are multiple states that do not recognize K-12 tuition as qualified expenses for state income tax purposes. As a result, using 529 funds may trigger unintended tax consequences at the state level. For example, in non-conforming states such as California, Colorado, Hawaii, Illinois, and Michigan, families may face state income tax on the earnings portion on the K-12 distribution, recapture any state income tax deductions or credits previously taken on those contributions, and/or lose additional state benefits tied to qualified higher education expenses. Proper planning can help you take advantage of your 529 plan while avoiding unexpected tax consequences.
On the other end of the academic journey, 529 plans can be used to repay qualified student loans with a lifetime limit of $10,000 towards student loan principal and interest. As with other non-traditional 529 uses, such as K-12 tuition or rollover to Roth IRAs, it is critical to review both Federal and state rules.
Option 5: Withdraw the funds
If you cannot use excess 529 funds in any of the ways already discussed, you may decide to liquidate the account. If you choose to liquidate the account, earnings that were not used for qualified expenses may be subject to income tax and a 10% penalty, so making this choice is certainly suboptimal. An exception would apply if your child receives a scholarship, in which case you would be able to withdraw up to the scholarship amount from the 529 plan without the 10% penalty, but taxes would still apply.
One Big Beautiful Bill:
What It Means for 529 Plans
The newly passed “One Big Beautiful Bill Act” (OBBB) (H.R. 1) introduced changes that expand the flexibility of 529 plans.4 The previous law allowed a range of tax-free withdrawals from qualified expenses such as $10,000 annually for K-12 education, as well as fees, books, supplies room and board for higher education. The new provision expands this definition by allowing tax-exempt distributions to cover additional educational expenses that are connected with enrollment or attendance at an elementary school, secondary school, or home school. Some of the features mentioned are as follows:
The timeline for 529 expansions may depend on guidance from the U.S. Treasury Department and the IRS. Many of the current rules will remain the same; examples include:
- No changes to Federal 529 contribution limits.
- Earnings in 529 plans continue to grow tax-deferred and withdrawals are tax-free if used for qualified education expenses.
- Non-qualified withdrawals subject to income tax on earnings + a 10% penalty (with some exceptions such as death, disability, and scholarships).
For families concerned about overfunding, the expanded definitions of qualified expenses under the OBBB may offer greater flexibility and additional opportunities to utilize excess 529 funds without triggering taxes or penalties.
Closing Thoughts
Having excess funds in a 529 plan is not a mistake; it can be an opportunity. With proper planning, you can minimize taxes and penalties, support your family’s long-term education goals, and create a lasting legacy. Whether your student is just starting their academic journey, is pursuing alternative educational paths, or has completed their schooling with funds remaining, 529 plans can offer a wide range of strategic options. As always, consult with your financial advisor and tax professional to determine the best strategy based on your specific goals.
1 https://my529.org/secure-2-0-how-it-affects-529-plans/
2 https://www.savingforcollege.com/article/roll-over-529-plan-funds-to-a-roth-ira
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy”, dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article does not constitute legal, tax, accounting, investment or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other strategy in the future, there are no assurances that any predicted results will actually occur.