Options for Unused 529 Funds: What to Do With Leftover Savings

Saving for education with a 529 plan is a smart way to prepare for future costs, but sometimes there’s money left over. Maybe the beneficiary received a scholarship, chose a less expensive school, or didn’t pursue higher education. Knowing how to handle unused funds can help avoid penalties and maximize savings.

Several options allow families to repurpose leftover 529 funds while maintaining tax advantages. Understanding these choices ensures compliance with IRS rules while making the most of the account.

Rollover to a Roth IRA

A new rule under the SECURE 2.0 Act in 2024 allows unused 529 funds to be rolled into a Roth IRA, offering a tax-free way to shift savings toward retirement. To qualify, the 529 account must have been open for at least 15 years, and contributions made within the last five years cannot be transferred.

The lifetime rollover cap is $35,000 per beneficiary, and annual rollovers must follow Roth IRA contribution limits—$7,000 in 2024 (or $8,000 for those 50 and older). The beneficiary of the 529 plan must also be the owner of the Roth IRA, meaning funds cannot be transferred to a parent’s retirement account.

This option benefits those who overfunded a 529 plan and want to avoid taxes and penalties on withdrawals. It also provides a head start on retirement savings, allowing tax-free growth. Since Roth IRAs have no required minimum distributions, the funds can continue compounding for decades, making this a strategic move for long-term financial planning.

Switching Beneficiaries

A 529 plan allows the account owner to change the beneficiary without tax consequences, as long as the new beneficiary is a qualifying family member. This includes siblings, parents, children, cousins, and in-laws.

If the original beneficiary finishes school with unused funds, transferring the account to a younger sibling can help cover tuition, room and board, or other eligible costs. If a child decides not to attend college, parents can designate themselves as the new beneficiary and use the funds for professional certifications or graduate degrees.

A 529 plan can also serve as a multi-generational education fund. If no immediate family members need the money, the account can remain open indefinitely and be reassigned to future generations. This allows parents or grandparents to set aside money for grandchildren’s education while benefiting from tax-free growth. Since 529 plans have no expiration date, they can be an effective way to preserve wealth for education.

Using for K-12 Expenses

A 529 plan can cover up to $10,000 per year in tuition for private or religious K-12 schools, easing the cost of early education while maintaining tax advantages.

Unlike college expenses, which can include room and board, books, and supplies, K-12 withdrawals are limited to tuition. Costs such as uniforms, extracurricular fees, and technology are not covered. The $10,000 cap applies per student, not per account, meaning families with multiple children can use separate 529 plans to maximize withdrawals.

State tax treatment varies. While federal law allows K-12 tuition withdrawals, some states do not follow this rule and may impose taxes or recapture benefits. Checking state-specific regulations before making withdrawals can help avoid unexpected tax liabilities.

Non-Qualified Withdrawals

Using 529 funds for non-educational expenses triggers taxes and penalties. Earnings on non-qualified withdrawals are subject to federal income tax and a 10% penalty, reducing the account’s benefits. The principal portion of the withdrawal is not taxed since contributions were made with after-tax dollars.

Plan administrators issue Form 1099-Q for withdrawals, detailing the total distribution, earnings, and original contributions. The recipient must report the taxable portion on their tax return, and higher-income individuals may face a larger tax burden.

Some account holders consider withdrawing funds for non-educational purposes when facing financial difficulties, but alternative strategies may be better. Adjusting the 529 plan’s investment strategy, delaying withdrawals, or rolling funds into other tax-advantaged accounts can help preserve value while minimizing penalties.

Scholarship Exceptions

If a beneficiary receives a scholarship, account holders can withdraw an equivalent amount from the 529 plan without incurring the 10% penalty on earnings. However, the earnings portion is still subject to federal income tax.

To use this exception, proper documentation is required. The scholarship amount must be verified, and withdrawals should match the awarded funds. If a beneficiary receives multiple scholarships over several years, tracking total awards and adjusting withdrawals accordingly can help optimize tax efficiency.

Some families choose to leave the funds in the 529 plan for future education, such as graduate school, rather than withdrawing and paying taxes on the earnings. Others may use the money for eligible expenses not covered by the scholarship, such as room and board, if permitted by the award’s terms.