What can you do with an unused 529 account?
A 529 account is a tax-advantaged savings plan designed to help families save for education expenses. These accounts are named after Section 529 of the Internal Revenue Code.
529 accounts come in two basic types: prepaid tuition plans and college savings plans. Prepaid tuition plans allow families to lock in today’s tuition rates for future use, while college savings plans allow families to save and invest money for future education expenses.
Contributions to a 529 account are made with after-tax dollars, but the earnings in the account grow tax-free. When funds are withdrawn for qualified education expenses, like tuition, fees, books, and room and board, the withdrawals are also tax-free. This can make 529 accounts a powerful tool for families looking to save for education expenses.
Each state offers its own 529 plan, and some plans offer additional state tax benefits. It’s important to compare plans and consider factors like fees, investment options, and performance before choosing a plan. Additionally, it’s important to understand the rules and restrictions associated with 529 accounts, such as the penalties for non-qualified withdrawals.
If you have an unused 529 account, there are several options available to you. Here are some of the most common:
Use it for a future education expense: If you or one of your dependents will be attending college or another eligible institution in the future, you can keep the funds in the 529 account and use them to pay for qualified education expenses like tuition, books, and room and board.
Transfer the funds to another beneficiary: If the original beneficiary of the 529 account decides not to attend college, you can transfer the funds to another eligible family member, such as a sibling or cousin. This can be done without incurring taxes or penalties, as long as the new beneficiary is a qualified family member.
Withdraw the funds: If you choose to withdraw the funds from the 529 account, you’ll need to pay taxes on any earnings in the account, as well as a 10% penalty. However, there are some exceptions to the penalty, such as if the beneficiary becomes disabled or receives a scholarship.
Leave the funds in the account: If you’re not sure what to do with the unused 529 account, you can leave the funds in the account and continue to contribute to it. This can be a good option if you anticipate needing the funds for future education expenses.
If you choose to invest the funds, you cannot avoid paying taxes on the interest earned by withdrawing the funds from the unused 529 account and investing them elsewhere. The earnings in a 529 account are tax-deferred, which means that you do not pay taxes on them as long as they remain in the account. However, when you withdraw funds from a 529 account for non-qualified expenses (i.e. expenses that are not for qualified education expenses), you will owe taxes on the earnings, as well as a 10% penalty on the earnings.
If you withdraw funds from an unused 529 account and invest them in a taxable account, you will owe taxes on any earnings generated by that account. This is because the earnings in a taxable account are subject to income taxes in the year they are earned. Depending on the investments you choose, you may owe taxes on dividends, interest, and capital gains.
It’s important to keep in mind that each state’s 529 plan may have different rules and regulations, so it’s a good idea to check with your plan’s administrator before making any decisions. It’s also important to carefully consider the tax implications of any financial decisions you make, including withdrawing funds from a 529 account. If you have specific questions or concerns, it’s a good idea to consult with a financial professional or tax advisor. Reach out to us for a consultation. We are here to help.