What Happens to a 529 if Your Child Joins the Military?
When your child joins the military, their 529 plan has several valuable uses. Understand your options to preserve and repurpose your educational savings.
A 529 plan is a savings account offering tax advantages when used for qualified education expenses. Parents and guardians use these plans to save for a child’s future college costs, with funds growing free from federal taxes. When the intended beneficiary chooses to enlist in the armed forces instead of pursuing a traditional degree, account owners often wonder about the best course of action for the accumulated savings.
The Military Academy Attendance Exception
A specific provision in the tax code addresses situations where a 529 plan beneficiary attends a U.S. military service academy. This rule allows the account owner to withdraw funds from the 529 plan without incurring the usual 10% federal penalty on the earnings portion of a non-qualified distribution. The amount eligible for this penalty waiver is limited to the estimated cost of attendance at the academy for that year. This exception applies to institutions like the U.S. Military Academy, Naval Academy, Air Force Academy, Coast Guard Academy, and Merchant Marine Academy.
While the 10% penalty is waived, the earnings portion of the distribution is still subject to ordinary income tax. The account owner will receive a Form 1099-Q to report the penalty-exempt withdrawal on their tax return. This exception applies only to attendance at a specified service academy and not to general enlistment or ROTC programs.
Changing the Plan Beneficiary
One of the most flexible features of a 529 plan is the ability for the account owner to change the designated beneficiary. If the original beneficiary joins the military and does not intend to use the funds, the account owner can name a new beneficiary without triggering taxes or penalties. This is permitted provided the new beneficiary is a “member of the family” of the old beneficiary.
The Internal Revenue Service (IRS) has a broad definition of who qualifies as a member of the family, which includes:
- The beneficiary’s spouse, children, stepchildren, foster children, adopted children, and their descendants
- Siblings, step-siblings, parents, and stepparents
- Nieces, nephews, aunts, uncles, and first cousins
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
The process for changing a beneficiary involves a form from the 529 plan administrator. This action is not a distribution, so the funds remain in the account to grow tax-deferred for the new beneficiary.
Retaining Funds for Future Use
An immediate decision is not always necessary when a beneficiary enlists in the military. Account owners have the option to simply leave the funds in the 529 account, where they can continue to grow tax-deferred. There are no age limits or time restrictions for when the money must be used, providing flexibility for the service member’s future.
A service member may pursue higher education later, and the 529 funds can be used for qualified expenses at eligible institutions, including vocational schools and graduate programs. This allows the original beneficiary to retain access to the savings.
The 529 plan funds can also be used to supplement military education benefits like the Post-9/11 GI Bill. While the GI Bill is a generous benefit, it may not cover all costs, especially at private universities. For the 2024-2025 academic year, the maximum tuition and fee reimbursement for private institutions under the Post-9/11 GI Bill is $28,937.09. The 529 funds can bridge the gap for expenses that exceed the GI Bill’s allowance.
Converting Funds to a Roth IRA
A newer option, made available by the SECURE 2.0 Act, allows for a tax-free and penalty-free rollover of 529 plan funds to a Roth IRA. This provides a way to repurpose education savings into retirement savings for the beneficiary. However, this transfer is subject to a strict set of rules that must be followed to qualify.
To be eligible, the 529 account must have been open for a minimum of 15 years. The Roth IRA must be established in the name of the 529 plan’s beneficiary, not the account owner. Any contributions made to the 529 plan within the last five years, along with the earnings on those contributions, are not eligible to be rolled over.
The amount that can be rolled over is constrained by both annual and lifetime limits. The rollover amount in any given year cannot exceed the annual IRA contribution limit for that year, and it counts toward the beneficiary’s total IRA contribution limit. A beneficiary must also have earned income at least equal to the amount being rolled over for that tax year.
There is a lifetime maximum of $35,000 per beneficiary that can be moved from a 529 plan to a Roth IRA. The transfer must be made directly from the 529 plan to the Roth IRA provider.