Owning an “overfunded” 529 college savings account is probably not the worst problem you can imagine. Still, it is a real concern for some parents facing highly uncertain college costs in the future. If the costs of a college education turn out much lower than expected, either through need-based aid, merit-based aid, or just choosing an inexpensive or in-state institution, it might become difficult to spend the full 529 balance on approved (“qualified”) educational expenses in four years. Fortunately, there are many options to preserve the tax-free and penalty-free withdrawal status of these accounts, including a new method that just became available last year.
First, let’s review the list of qualified expenses that a 529 account can cover. The four main types are:
(1) Tuition and fees (up to 100% for post-secondary educational institutions)
(2) Books and supplies
(3) Computers, software, and internet (for college use only)
(4) Room and board (if enrolled at least half time).
Note that transportation and health care are not qualified expenses, but the four kinds of allowed expenses are fairly broad and will cover much of the total cost of college.
But what if there is still money left over after covering all of the expenses listed above? In that case, 529 account holders still have many options:
- Change the beneficiary to another child (or any other family member, including yourself). If one child attends an inexpensive school, but another enrolls in a costly private school, you can switch the beneficiary to the child who needs more funds. In fact, there is no limit to the number of times the beneficiary can be changed, so there is a lot of flexibility built in. You could even change the beneficiary to your spouse or yourself if you want to take some classes for fun at a local college.
- Use the balance for graduate or professional school. Will your child attend business school, law school, or medical school? The remaining 529 balance(s) can be used for post-graduate education, as well. There’s no deadline for spending 529 balances, so you can wait as long as necessary until post-graduate plans are made. Balances will continue to grow tax-free in the meantime.
- Rollover unused funds to a Roth IRA in the name of the beneficiary. This is a new option that just became available in 2024 after the passage of SECURE Act 2.0. There are several stipulations to keep in mind when using this option however:
- There is a lifetime limit of $35,000 per rollover.
- Any funds that are rolled over must adhere to the annual IRA contribution limits, which is $7,000 per year in 2025 for anyone under age 50.
- The 529 account must have been established for at least 15 years.
- Contributions made in the last 5 years are not eligible for a Roth rollover.
- The beneficiary must have earned income in an amount at least as much as the annual rollover amount.
- Use the funds for a grandchild’s K-12 expenses. You can change the beneficiary to a grandchild and use the remaining balance (up to $10,000/year) to cover their private K-12 education.
If the combination of those four options is still not sufficient, you can withdraw funds for any other reason. Bear in mind that you will owe taxes and a 10% penalty on the earnings (but not on your original contributions). Perhaps this is not the most attractive option, but it does mean that you can still access these funds even if you do not have enough “qualified” ways to spend them.
A well-funded 529 savings account is one of the keys to successful college planning. Executed correctly, 529 accounts offer many advantages including professional management and tax-free growth. When all of the options for using the balances in a 529 plan are carefully considered, the concern over contributing “too much” should be alleviated for most parents of college-bound children.
