529 Plans: Still a Solid Choice for Education Savings

Some fear overfunding a 529 account and having the funds 'trapped' forever, which has led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education. [1] This doesn’t have to be the case though; there are a number of appealing options if you find yourself with an overfunded 529 account. Here are five flexible options 529s offer, making them a viable option still for education savings.

1. Owners can change the beneficiary.
   While 529 plans are designated to save for future education of one designated beneficiary, the beneficiary flexibility allows the owner to make beneficiary changes twice per year. A 529 owner can change the beneficiary at any time without tax consequences if the new beneficiary is a “member of the family,” which is defined in Internal Revenue Code section 529. If the new beneficiary is not a member of the family, the change will be treated as a non-qualified distribution and the earnings portion of the account may be subject to income tax along with a 10% penalty. It’s also important to note that if the new beneficiary is two or more generations below the current beneficiary, the change may result in generation skipping transfer tax (GST).
   
   Of note, you can also change the beneficiary of the account to yourself, so if you’ve always had your eye on a basket weaving course at your local community college, this may be your time to make it happen!
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2. Funds can be used for elementary through graduate school.
   K-12 tuition is also considered a qualified education expense. Up to $10K per year from a 529 account can be used to pay for elementary and secondary tuition at public and private schools. By changing the beneficiary of a 529 account, you may be able to use leftover funds to pay for K-12 tuition for another “member of the family.”
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3. Scholarship funds can be withdrawn penalty free.
   In the event the original beneficiary of a 529 account receives a scholarship or military academy attendance, you can withdraw up to the amount of the scholarship benefit received from the plan and avoid the 10% penalty. Taxes will still be owed on the earnings portion of this withdrawal, but you could think of it in a different light as if the funds had been an UTMA/UGMA all along instead of a 529, where taxes would have been due on the earnings as well.
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4. Unused funds can rollover into a Roth IRA.
   As a result of Secure Act 2.0, beneficiaries now have the option to rollover unused 529 funds into a Roth IRA for their benefit over their lifetime. These rollovers are subject to Roth IRA annual contribution limits ($6,500 per year in 2023), the 529 account must have been open for more than 15 years, the child must have includable compensation at least equal to the amount of the rollover, and this benefit is capped at $35,000 per beneficiary. This new option for unused 529 funds can be incentivizing for the child to use their funds wisely knowing that leftover savings can help start their retirement savings. Given the rule that the 529 must have been opened for 15 years, it would be possible to begin these rollovers at age 16 (assuming the child had includable compensation to match the rollover) and have maxed out the lifetime cap of $35K by age 20. Funding a Roth IRA in this manner can be an extremely beneficial tool to help turbocharge a child’s retirement savings by compounding early.
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5. Funds can be used for alumni trips around the globe.
   Many large colleges and universities now provide educational alumni trips to places all over the world. International travel costs don’t qualify as an eligible expense, and room & board expenses would only be covered if you were enrolled at least half-time as a student at the educational institution, but the tuition for a European culinary course offered by your alma mater is one more way to use excess 529 funds.
   
   I’ve highlighted a few of the options that may be worth considering, in the event you find yourself with an overfunded 529 account, but every investor’s situation is different. If you have any questions, please feel free to reach out to your Relationship Manager at Balentine. We strive to provide holistic financial planning to our clients that takes into account their full financial picture.

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[1] United States Senate Committee on Finance: SecureAct 2.0 of 2022

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