Socking away money into a 529 plan is a smart move for parents who want to help their kids with the cost of college so they don’t end up overburdened by student loans. Compared to a Coverdell Education Savings Account, 529 plans offer a lot more flexibility in terms of how much you can save, who can use the money and what you can do with any excess that’s left over once your student graduates. If you’ve been saving diligently for your child’s education and you anticipate having a surplus, here are five ways to put it to good use.
Save It for Grad School
One of the great things about saving money in a 529 plan is that you’re not limited to using it just for a bachelor’s degree. Students can also apply the funds towards a graduate or professional degree at a qualified educational institution, which simply means any college or university that’s eligible to participate in federal student aid programs.
Generally, the kinds of things you can use 529 plan money for include tuition and fees, books, supplies and room and board for students who are attending at least half-time. You can’t apply withdrawals towards basic living expenses, transportation or health insurance, however. And if your grad student ends up using the money for something that falls outside the range of a qualified expense, you could be on the hook for a tax penalty.
Switch up the Beneficiary
If you’ve got more than one child who’s planning to head off to college, it makes sense to transfer any excess 529 funds to them if they’re going to need the extra dough. All you have to do is contact your plan administrator and tell them you’d like to change the beneficiary on the account.
Even if you don’t have any other kids, that doesn’t mean the money will go to waste. You could also designate a niece, nephew, aunt, uncle, spouse or yourself as the account beneficiary. Just keep in mind that you’re only allowed to change beneficiaries once a year.
Hang onto It for the Grandkids
Unlike a Coverdell ESA, there are no time limits on when you have to withdraw money from a 529 plan. If there’s no immediate need for the unused funds, you can just let them sit until your kids have children of their own. You’d need to designate yourself as the beneficiary, but you could always switch it over to a grandchild down the road. Even if you don’t make any further contributions, the money that’s already in the account will continue to grow tax-free.
Use It for Other Expenses
While the whole point of a 529 plan is to save for educational expenses, you’re not necessarily required to use the money to that end. If you need to pay off debt, make some improvements to your home or just go on vacation, you have the option of tapping the leftovers from your child’s college fund. There’s a catch, however, since you’ll pay a price for doing so.
Any time you take money from a 529 and use it for something other than college costs, the IRS expects you to pay income tax on the earnings. The tax is usually assessed at your individual rate, rather than the beneficiary’s, which could substantially increase what you owe when it’s time to file. Not only that, you’ll also have to cough up a 10-percent penalty on the earnings portion of the withdrawal.
Leave It to Your Heirs
Since you’re not required to take distributions from a 529 plan by a specific date, you also have the option of leaving it alone for the time being. If you’ve been proactive about estate planning, you can designate who you’d like to take control of the account once you’re gone. It’s also possible to transfer the account into a trust, although this typically requires a little more time and expense to make sure it’s done properly.
Leaving the leftover portion of the account intact serves two purposes: it allows the balance to continue growing and you don’t have to worry about penalties for non-qualified withdrawals. You may also be able to minimize the amount of estate tax your beneficiaries will owe after you’re gone. Once the 529 account is passed on to your heirs, then it’s up to them to decide what the best way to use it really is.
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