What Happens to a 529 Plan When the Child Turns 18?

A 529 plan is a tax-advantaged savings and investment vehicle designed to help families cover future education expenses. These plans offer federal and often state tax benefits, as funds grow tax-deferred and qualified withdrawals are tax-free. They provide a dedicated savings mechanism for educational pursuits, from kindergarten through graduate school.

The 529 Plan and Age 18

When a 529 plan beneficiary reaches age 18, the account’s fundamental structure and control typically remain unchanged. The account owner, usually a parent or guardian, retains legal ownership and decision-making authority over the funds. The beneficiary does not automatically gain control of the account or its assets simply by becoming an adult.

The tax-advantaged nature of the 529 plan also continues without alteration once the beneficiary turns 18. Funds do not become taxable at this age, nor are there mandatory withdrawal requirements. The plan can continue to receive contributions, and its investments can grow tax-deferred indefinitely. An exception to this control dynamic is with a custodial 529 plan, where the beneficiary assumes control upon reaching the age of majority in their state, typically 18 or 21.

Using 529 Funds for Qualified Expenses

Once the beneficiary enrolls in an eligible educational institution, 529 funds can be withdrawn tax-free for qualified higher education expenses. These expenses include a broad range of costs associated with enrollment or attendance at colleges, universities, vocational schools, or other postsecondary institutions eligible for federal student aid programs. Qualified expenses include tuition and fees, books, supplies, and equipment required for coursework. Computer equipment, software, and internet access also qualify.

Room and board expenses are also considered qualified, provided the student is enrolled at least half-time in a degree or certificate program. For students living on campus, the qualified amount is the actual cost charged by the institution. If living off-campus, the qualified amount for room and board is limited to the allowance for these expenses included in the school’s cost of attendance for federal financial aid purposes. This can include rent, groceries, and utilities within the school’s allowance.

The account owner typically initiates the process for requesting distributions from a 529 plan. Funds can be sent directly to the educational institution, reimbursed to the account owner, or sent directly to the beneficiary. For tax reporting, it is advised to ensure withdrawals are made in the same calendar year that qualified expenses were paid. Maintaining detailed records and receipts of all qualified expenses is important for tax documentation.

Options for Remaining or Unused Funds

If funds remain or are unused, the account owner has several options. One approach is to change the beneficiary to another eligible family member. The Internal Revenue Service provides a broad definition of “eligible family member,” which includes siblings, step-siblings, children, stepchildren, parents, stepparents, aunts, uncles, nieces, nephews, first cousins, and spouses of any of these individuals. This allows for the tax-free transfer of funds for another family member’s educational needs.

Another option involves rolling over funds to an ABLE (Achieving a Better Life Experience) account. This can be done without incurring taxes or penalties if the beneficiary has a qualified disability. The amount rolled over is subject to the annual ABLE account contribution limit, which is $19,000 for 2024. This rollover provision is currently set to expire on December 31, 2025, unless extended by legislation.

A new flexibility, introduced by the SECURE 2.0 Act of 2022, allows a limited amount of unused 529 funds to be rolled over into the beneficiary’s Roth IRA. This tax-free and penalty-free rollover is subject to several conditions. The 529 account must have been open for at least 15 years, and any contributions made within the last five years are not eligible for rollover. There is a lifetime maximum rollover limit of $35,000 per beneficiary, and annual rollovers cannot exceed the Roth IRA annual contribution limits, which is $7,000 for 2025 for those under age 50. The beneficiary must also have earned income at least equal to the amount transferred in any given year.

If none of these tax-advantaged options are suitable, the account owner can take a non-qualified withdrawal. The earnings portion of a non-qualified withdrawal is subject to federal income tax at the account owner’s or beneficiary’s ordinary income tax rate, plus an additional 10% federal penalty tax. However, there are specific exceptions where the 10% penalty may be waived, even though the earnings remain taxable. These include the death or disability of the beneficiary, the beneficiary receiving a tax-free scholarship, or attendance at a U.S. Military Academy.