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What to Do with Unused College Savings Account Funds

Congrats! You met your savings goal to provide money to send a child to college. There are many scenarios, however, that could leave you with unused money in that college savings account—perhaps your child decided not to attend college and picked another professional path, or they won several scholarships, or decided to enlist in the armed forces, or they finished college early.

What do you do now? Do you have to forfeit that money? Not at all. You, as the owner of the account, have many options.

What are your options with the leftover money?

The rules for using funds in 529 savings plans are pretty flexible (for all the information you could want on this, read Internal Revenue Code Section 529). Here are five of them.

Use the money for tax-favored expenses

Using as much of the money as you can to pay for tax-favored expenses is always a smart move. These qualified expenses go beyond tuition to include student fees, books, supplies, equipment required for the enrollment or attendance, a computer, peripheral equipment, computer software, and room and board up to certain limitations.

Change the beneficiary

You can change the beneficiary on the account to another family member. Just like the qualified expense above, this won’t incur any fees or taxes. Eligible family members include:

  • Spouse
  • Son, daughter, stepchild, foster child, or adopted child
  • Son-in-law, daughter-in-law
  • Siblings or stepsiblings
  • Brother-in-law, sister-in-law
  • Father-in-law, mother-in-law
  • Father or mother or ancestor of either, stepmother, stepfather
  • Aunt, uncle, or their spouse
  • Niece, nephew, or their spouse
  • First cousin or their spouse

You could also pay for the private K–12 education expenses of the applicable relatives listed above. When you’re deciding on a beneficiary, know that skipping a generation—i.e. making a grandchild the beneficiary—could trigger a tax penalty. If you’d like the funds to be used for a grandchild, you could transfer ownership of the account to your child without triggering income taxes, and then they could name your grandchild (their child) as beneficiary.

You can also make yourself the beneficiary to pay for your continuing education. Qualified expenses include tuition and fees from most community colleges and some outdoor education programs.

Save for a child’s future educational needs

There’s a chance your child will want to return to school to pursue a graduate degree or professional program (eligible post-secondary institutions include vocational and technical schools). There’s no rush to use up your saved 529 funds; you can let the money sit there and generate funds in case a child wishes to return to school.

Pay down student loans

Thanks to the recently passed SCURE Act, you can use up to $10,000 toward the student loan debt of the beneficiary and $10,000 per each of their siblings (however, the portion of student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest tax deduction).

Use the money for something else entirely

If none of these options make sense for you, you still have the option of withdrawing the money and using it for whatever you’d like. Of course, earnings on the account will be treated as taxable income, and you’ll pay an additional 10% penalty if that money is not spent on qualified educational expenses. The initial contribution funds were made after taxes so won’t be taxed again.