Most families have run out of money in their 529 education savings accounts. But, some do. There are several options for using the remaining money.
Reasons for money remaining in a 529 plan account
There are many reasons why a family may have money left over in an Education Savings Plan 529 account.
- The family may have saved more than they needed to pay for their education.
- The student may have enrolled in a low-cost college, such as a state public college or one of six dozen colleges with generous “no-loan” financial aid policies.
- The student enrolled in a US military academy, where most university fees are paid by the federal government.
- The student won a large scholarship or received an education grant paid by the employer.
- The student did not go to college or drop out of college.
- The student died or became disabled.
Options for using the remaining 529 plan money
If there is money left in a 529 plan, you can change beneficiary to a relative of the current beneficiary. Parents include brothers, sisters, parents, grandparents, aunts, uncles, cousins, nieces, nephews, children, descendants and their spouses.
You can working capital from plan 529 to plan 529 of a brother or other family member 529 plan or account ABLE.
There is no need to make a distribution, as there is no age or time limit for distributions. You can just leave the money in the plan 529. Since the beneficiary can be replaced by the beneficiary’s children, grandchildren, and other descendants, a 529 plan can be a great way to leave a legacy for future generations.
The 529 Plan will continue to make money even after the 529 Plan account balance has reached the aggregate contribution limit.
Maybe the child will decide to go back to college later. A 529 plan can be used to pay for higher education, as good as continuing education expenses, not just undergraduate school. The recipient does not need to be looking for a degree.
A 529 plan can be used to pay off student loans the beneficiary and the beneficiary’s siblings. If the account holder changes the beneficiary to a parent, the 529 plan can also be used to pay off parents’ loans. There is a lifetime limit of $ 10,000 per borrower that applies globally to all 529 plans. This will most often be helpful when an older brother or sister graduated from college several years ago and still has student loans of their own education.
The last option is to make an unqualified distribution.
Ineligible distributions from a 529 plan
The portion of earnings from an ineligible distribution is taxable at the beneficiary rate plus a 10% tax penalty.
There may also be clawbacks of state tax breaks to the extent that they are attributable to unqualified distribution.
The beneficiaries of a 529 plan distribution can include the beneficiary, the account holder, and a college attended by the beneficiary. If the payment is made to a college, a non-qualifying distribution will be taxable to the beneficiary, not the account holder.
Usually, it will be better if the beneficiary is the beneficiary, since the beneficiary will often be in a lower tax bracket.
Gains are included in a prorated allocation. You cannot take a distribution of contributions alone, unlike a Roth IRA.
If there is more than one 529 plan, take an unqualified distribution from the 529 plan with the lowest percentage of income, as taxes and penalty tax are based only on the income portion of the unqualified distribution, not the amount. total amount of the distribution.
The tax penalty can be waived
The tax penalty will be waived in certain situations.
- If a distribution does not qualify because the recipient received non-taxable educational assistance, such as a scholarship, veterans education assistance, or employer-paid educational assistance, the penalty tax will be waived on. non-eligible distribution up to the amount of non-taxable education assistance.
- If the distribution is not eligible because the recipient attended a military academy, up to the cost of study at a military academy, as defined in 10 USC 2005 (d) (3).
- If the distribution is not eligible due to coordination restrictions with the American Opportunity Tax Credit (AOTC) or Lifetime Learning Tax Credit (LLTC), up to the amount of the expenses that were used to justify the credits. tax for studies.
- The beneficiary dies or becomes disabled.
If the tax penalty is waived, investing in a 529 plan is no worse than investing in a taxable account.
Can you donate the money left over from the 529 plan to charity?
There is no special provision for account holders to donate the remaining 529 funds in the plan to charity. So, to donate the funds to charity, the account owner must make an unqualified distribution and pay taxes and penalty tax on the profit portion of the distribution.