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What to do with Leftover 529 Account Funds

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Many people open “529 accounts” for their young family members. They open these accounts hoping that the child will use the money to pay for future education expenses.

College savings plans (usually referred to as 529 accounts) are designed to help families save for their child’s educational future in a tax advantageous manner. But what happens to that money when the child decides not to pursue higher education? Or, when the child gets a scholarship that covers their college tuition? What should you do with the money left in the 529 account?

One option is to withdraw the money, but this may not be the best idea. If you (as the contributor) or the beneficiary  withdraw the money, the earnings portion of the withdrawal will be subject to taxes and a 10% penalty fee. There are things you can do to minimize or even avoid those taxes and penalties though.

Change the Beneficiary

A 529 account can only have one beneficiary. But, the 529 account owner can change who that  beneficiary at any time. To avoid tax consequences, the account owner should choose another qualified family member to be the new beneficiary. A qualified family member could be another child, spouse, sibling, parent, in-law, cousin, aunt, uncle, niece, nephew, etc.

If you have another child pursuing higher education, a niece or nephew on track to go to college, or a spouse that wants to get a masters degree, you can make them the beneficiary of the account and support their educational goals.  But, be careful. If your 529 account has significant assets, you might actually have made a new gift for gift tax purposes.

Pay off Student Loans

Student loan payments are considered qualified education expenses. This means families can take 529 plan distributions to pay off these student loans. You can pay up to $10,000 in qualified student loan repayments per each 529 beneficiary and their siblings. Also, don’t forget the prior suggestion: you can change the 529 plan beneficiary at any time. If the original beneficiary does not  have student loans, you could change the beneficiary to help pay off other family members’ student loans. One limitation: only some student loans will qualify. Recent changes in student loan forgiveness rules might complicate the usefulness of this technique.


Transfer to a ROTH IRA

Starting January 1, 2024, you’ll be able to transfer the money into a Roth IRA for the beneficiary. Owners of 529 accounts will be able to transfer up to a lifetime limit of $35,000 from a 529 account to a Roth IRA tax and penalty free. It is important to know that Roth IRA annual transfer limits will still apply. That may mean that it takes two or more years to Make the full transition. 

In order to use this new program, you must have had the 529 account for at least 15 years. You also must have contributed the money to the 529 account at least 5 years prior to transferring it to the Roth IRA. But remember that the 529 account can continue to grow, free of income taxation, while you wait out the time limits.

Leave it in the Account

If you are not sure that the beneficiary is done with school, you could just leave the money in the account for now. You never know when your child or grandchild will decide to go to college, return for a masters degree, or attend a trade school. Many people do not attend college right out of high school, or drop out only to return again when they have more life experience. There are no time limits on how long you have to use your 529 account. If you think the beneficiary may have educational expenses in the future, you may want to leave the money there.

Transfer to ABLE Act Account

If your 529 account beneficiary is disabled, you might be able to transfer the remaining balance — or some part of it, at least — to an ABLE Act account for the same beneficiary. ABLE Act accounts are themselves very complicated to explain, and we have tried to do that several times in previous articles and podcasts. This strategy is also fraught with challenges, so talk with us (or another qualified planning firm familiar with the issues) before you undertake the transition.

In a nutshell, you can transfer up to the annual contribution amount from the 529 account to the ABLE Act account. In 2023, that means $17,000; it’s expected to increase to $18,000 in 2024. And any transfers limit the ability to contribute other money to the ABLE Act account. On top of that, the transferred money is subject to a state payback requirement. So use this technique carefully — but it can be a great idea.

Penalty-free Withdrawals

There are some specific cases where you can make non-qualified withdrawals from a 529 account without penalty. These cases include when the beneficiary dies, becomes disabled or attends a U.S. Military Academy. If you have leftover funds because the beneficiary earned a scholarship, you can also withdraw the amount of the scholarship penalty free. While these non-qualified withdrawals do avoid penalties, you will still have to pay taxes on any gains in the account.

At the end of the day, there are many things you can do with funds left in your 529 account. That’s true even when the initial beneficiary is no longer interested in pursuing higher education.

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Robert B. Fleming


Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman


Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson


Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

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Matthew M. Mansour


Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.