One way to save for your child’s college is to use an education savings account such as a 529 plan.
I’ve been putting money into a 529 plan for my son since he was six years old. When he graduates in about four years, he’ll have some money to help him pay for college.
But what happens if your child doesn’t use all the money in a 529 plan? Perhaps they got a scholarship. Maybe they decided on an associate’s degree or vocational training instead of a four-year degree.
Where does the money go?
The good news is that you can still access that money. However, the way you access it matters, so carefully consider your options before you move forward.
529 plan withdrawals and penalties
It’s possible to withdraw the money from a 529 plan, but it might not be your best choice, said Scott Higgins, CFP, a financial advisor with Rose Street Advisors.
When you withdraw money for non-qualified expenses, said Higgins, “the earnings portion is considered ordinary income and subject to federal income tax.” Not only that, but the earnings are also subject to a 10 percent penalty from the IRS.
Higgins pointed out that the principal portion is not subject to the 529 plan penalty. Because contributions to the 529 plan are made after-tax, you don’t see the same impact on principal. However, if your state offers a state income tax deduction for contributions, the state might require you to repay all or part of your tax benefit.
3 ways to use leftover 529 plan money
Before you decide to make 529 plan withdrawals for non-educational expenses, consider using the money in a better way. Here are three ways you can avoid paying taxes and penalties on the earnings.
1. Change the beneficiary
“An account holder may change the beneficiary for the benefit of another qualifying family member, such as other children or grandchildren,” said Higgins.
If you have money left over from one child, you can change the plan beneficiary to someone who will be going to school soon. “The balance may remain in the account indefinitely with no required withdrawals,” Higgins said. So you can even wait until your child has his or her own children.
However, there might be other problems when you skip a generation. “Generation skipping … could trigger tax penalties depending upon on how much you gift and to how many beneficiaries,” said Greg Knight, a CFP with Engage Advising.
Consult with a financial professional or tax professional before you move forward. You want to ensure that you get the best use of the money by minimizing potential taxes.
Another thing to consider is that assets in a 529 plan owned by the parent or student count against financial aid on the FAFSA. But what you have in a 529 for a grandchild doesn’t.
However, once you start withdrawing money for your grandchild to use for college, it counts as untaxed income to the student. That’s when it can impact their financial aid. So, it’s important to keep this in mind and plan accordingly.
2. Take advantage of scholarship withdrawals
Another option is to withdraw some of the money for other uses if your child ends up with a scholarship.
“If a child receives a scholarship, a withdrawal may be taken in an equal amount up to the tax-free scholarship,” said Higgins. “The withdrawal will be subject to the federal income tax on earnings, but the 10 percent penalty will not apply.”
A scholarship can be a great way to pay for school – after all, it’s free money. It reduces what you need to pay and what your child needs to borrow. Prepare as much as possible with an education savings account 529 plan, and know that you have options if your child gets a scholarship.
Of course, if you don’t want to pay taxes on the earnings, you can revert to naming a new beneficiary so someone else can use the money.
3. Use it for yourself
Even you can benefit from the leftover money in a 529 plan. The 529 plan penalty doesn’t apply if you become the beneficiary and use the money for qualified educational expenses.
So if you dream of going back to school, now is your chance. Especially since you can do it penalty-free.
Carefully consider your 529 plan withdrawals
In the end, you want to manage your withdrawals to minimize the 529 plan penalty. If possible, take steps to ensure that the money is used for qualified expenses. That way, you avoid taxes on the earnings, and you stay away from the 10 percent penalty.
However, there are times when you might not be able to use the money for qualified education expenses. Or maybe you decide you need the money for something else. If that’s the case, it might be worth it go ahead and accept the taxes and penalty just to get access to the capital.
Consult with a financial professional as you weigh the pros and cons. That way you understand the implications ahead of time and can make the best decision about using your 529 plan money.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|