As the end of another academic year passes, many Americans now ask themselves what they should do with their leftover college savings. Fortunately, you are not without options. As the most used college savings vehicle, 529 savings plans offer flexibility to the account owner. The owner of the account controls it, not the beneficiary.
As the owner, you may take the money out and use it at your discretion. However, any earnings in the account will be taxable to you. Remember, you will pay an additional 10% penalty if the money is not spent on qualified educational expenses.
People often forget that a 529 plan beneficiary can be changed up to twice per year. This would allow you to use your eldest child’s remaining account balance for your younger children’s educational expenses. To enact this change, you must simply change the account beneficiary through your account. If all of your children have completed their post-secondary education, see additional options below.
One of the most tax-efficient choices is to keep the leftover funds invested in the 529 plan to grow and use for future generations (i.e., grandchildren). The 529 plan can cover the same qualified expenses without any taxation. Also, if your grandchildren are going to attend a private elementary or high school, up to $10,000 per year can be allocated to these expenses using 529 plan funds.
As the owner of the account, you are provided autonomy in the decision-making of the account’s funds. You can distribute a portion or the entire balance of the account for any reason (non-qualified expenses). The catch is that any earnings in the account will be taxed as ordinary income, and the growth would also be subject to a 10% withdrawal penalty, as mentioned above.
If your child received athletic or academic scholarships during college and you didn’t dissipate their 529 plan balance, you can take withdrawals from the 529 plan for the scholarship equivalent amount. Any scholarship equivalent distribution would still incur the ordinary income taxes on the earnings portion, but you would avoid the 10% non-qualified expenses penalty on earnings.
One other option would be to change the 529 plan ownership to your child beneficiary. From time to time, people use this as a graduation gift. By changing the account ownership, you do not incur any taxes and your graduate can do what they wish with the funds. However, if the funds are distributed to pay for non-qualified expenses, they will incur any applicable taxes and penalties. However, transferring ownership of the plan may have some benefit to it if you plan to liquidate the account because, more than likely, your graduate is in a lower tax bracket than you.
Like with other major financial decisions, deciding how to repurpose your leftover 529 savings plan fund should not be done in isolation. Instead, it should be made based on our comprehensive financial strategy. Although families and individuals have a variety of needs and goals, it is generally good to consult your financial planner to help you review the merits of each option.
If you are unsure how to use the leftover 529 savings plan funds or are in need of a trusted comprehensive financial planning that fits your specific needs as a physician or dentist, please reach out to one of our financial planners at Spaugh Dameron Tenny.
As the Director of Financial Planning for Spaugh Dameron Tenny, Jordan applies his academic and practical experience in the creation and maintenance of the firm’s financial plans, as well as coordinating research efforts for products and strategies that may benefit clients. Originally from Canada, Jordan came to Charlotte on a golf scholarship where he attended Queens University of Charlotte. In addition, Jordan has a Master’s degree in Wealth and Trust Management.
For over 50 years, Spaugh Dameron Tenny has provided comprehensive financial planning for physicians and dentists across the U.S. In addition to providing personalized advice, we walk our clients through their options to help maximize finances and maintain financial security.
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