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What happens to leftover money in a 529 plan?

My daughter got an athletic scholarship for school and as a result our expenses are not nearly as high as we thought they would be. Are we able to withdraw any remaining money at the end of her college years without penalty?

Mar 12, 2012 by Norma from Franklin, TN in  |  Flag
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Jim is spot on. You can withdrawl amounts equal to the scholarship without the penalty, just the tax on the growth. If you deposited $100k and it is now worth $150k, one third of your distribution would be taxable gain and not subject to the penalty. As Evan also mentioned, you can transfer remaining amounts to any other beneficiary including your other kids, yourself if you choose to go back to college, nieces/nephews, grandkids, etc. Lastly, you may elect to make the distribution and pay the tax and penalty. I had a client with $220,000 in a 529, and a basis of $202,000, so he only had to pay tax and penalty on $18,000 to have access to the funds. His total tax hit was $6,300 which he deemed acceptable to access the funds for his other needs.

Comment   |  Flag   |  Mar 12, 2012 from East Dundee, IL

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Norma, Here are some options: -Assign another "beneficiary" to the balance of the account. Examp; another child, first cousin of your child, any other immediate member of your family[Husban/Wife]. Maintain the assets in the account and assign to a future granchild. If you liquidate the account you will pay a 10% penalty on all gaines withdrawn. Depending on the account balance and your particular situation, it may make sense to let the account grow for future use. This is not a bad problem to have. You have done a good job of providing for your daughters education. Good Luck DC

Comment   |  Flag   |  Mar 12, 2012 from Asbury Park, NJ

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Jim Blankenship Level 17

Norma,

During the years that your daughter receives the scholarship, you are allowed to remove offsetting amounts from the 529 plan without penalty. You will still have to pay income tax on the growth of the funds (above and beyond the contributions), but no penalty. The distribution must be done in the year that the scholarship is received in order to be free of the penalty.

jb

2 Comments   |  Flag   |  Mar 12, 2012 from New Berlin, IL
Evan M. Levine, ChFC

Thanks. I wasn't aware of the scholarship offsetting feature.

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Flag |  Mar 12, 2012 near Port Washington, NY
Jim Blankenship

It's one of those "slippery" facts that can be hard to recall. The same treatment is available in the event of death or disability of the beneficiary/student.

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Flag |  Mar 12, 2012 near New Berlin, IL

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Technically, any money you withdraw from a 529 plan that is not used for higher education is subject to both income tax and a penalty. You can transfer the account to a sibling or cousin - or just hold it and let it keep growing tax deferred. Down the road you can transfer it to a grandchild or use it for your own retirement. The long term tax deferrel could make up for the tax and penalties if you hold it for a long enough time period. Good luck!

Comment   |  Flag   |  Mar 12, 2012 from Port Washington, NY

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