What to Do If You Saved Too Much in a 529 College Plan

Welcome to week 2, of You Ask, I Tell. This week I want to share an interesting question I am hearing from some parents. It’s a “nice” problem to have, but still a problem:

My kid just got a great financial aid package to school, and it looks like we won’t need to use the money in our 529 for college costs. What are our options?

Let’s first make sure everyone is up to speed on why a 529 College Savings Plan is a great way to pay for school. Money you contribute to a 529 plan grows without any taxes, and if you eventually withdraw the money to pay for qualified school costs, there is no tax on any investment gains. That can be a fantastic deal.

But as some parents have been sharing with me, their kid got more in scholarships and merit aid, and now they don’t think they will need to use all the money in their 529 account but aren’t sure what options they have for using the money on something other than college.

Here’s what you need to know:

•If your freshman got a fantastic aid package, celebrate! But keep in mind that aid can change year-to-year. So don’t be in a rush to use the 529 money before your kid hits senior year.

•Withdrawals from a 529 that aren’t used for qualified costs will be hit with a tax bill and a 10% penalty. The only portion that is taxed is your earnings; there is no tax or penalty on money you contributed and then withdraw for a non-school expense. Some states may also levy a penalty. Some good news: if your child receives a scholarship, you can withdraw the same amount from a 529 without owing the 10% penalty, though income tax will still be due on the earnings portion of a non-qualified expense.

That said, there are ways to avoid the penalty and tax and still put the money to great use.

•Transfer the beneficiary to another family member. Got more kids heading off to college? The beneficiary can be transferred to a sibling or step-sibling. Or you can transfer it to the spouse, in-laws, aunts, uncles, and first cousins of the current beneficiary.

•Save it for graduate school.

•Use it for yourself. So many of you say you want to keep working until you are 70. If you think going back to school to freshen your skills, or try something new, you can use the 529.

•Use if for K-12 expenses. The recent federal tax reform that went into effect in 2018 now allows 529 money to be used for qualified costs before your kid hits college. This includes tuition for private school, as well as other expenses such as books, fees and computers if they are required.

•Save it for the grandkids. If you don’t need the money today, consider keeping it growing for future grandchildren.

For those of you with 529s, the best resource for advice is savingforcollege.com.