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What Can I Do with Excess 529 Balances?


You did everything right: Proactively saved, raised an academically successful kid, and guided your child to the successful completion of her degree. There's just one problem: You've got leftover money in that 529 account.

personal finance, college savings, 529 plan

Our firm has received several questions lately about what to do with funds left in a 529 account after a child has graduated college. While this prospect seems to generate ominous feelings, saving too much money is not a bad thing. Faced with this scenario, there are several options to turn lemons into lemonade.

The first group of options involves simply leaving the funds in a 529 account. Just because the beneficiary of the account has earned their undergraduate degree does not mean the funds can’t stay in the account. In fact, while a 529 plan may have its own rules, there is no IRS-imposed age deadline to make withdrawals from a 529. If there is a chance that the student will attend graduate school, simply leave the remaining balance in the account and enjoy tax-deferred growth. Another option is to change the beneficiary of the 529 account. If there is another child or family member who will be attending college or graduate school, the account owner could name them as the account beneficiary and request a withdrawal to pay for qualified educational expenses. The account owner can potentially change the beneficiary of a 529 account to his/her self or a member of their family. “Family” is defined by the IRS Publication 970. There may be tax consequences if the transferee does not fall in this stated definition of family.

If the account owner is the beneficiary’s parent, naming the parent/account owner as the beneficiary may be an attractive option. Have you wanted to take a college course? If so, you can also use the 529 balance. One of the more interesting options involves so called experiential learning. The key point with 529 withdrawals is that to optimize the tax-free nature of the account, the funds must be used for qualified education expenses at an eligible institution that generally is eligible to participate in a student aid program administered by the Department of Education. However, qualified education expenses can also be somewhat non-traditional! Through a partnership with a University Extended Studies program, the outdoor education program Outward Bound has recently started accepting 529 funds as payment for their programs.

If none of these options are attractive, you can simply withdraw the remaining balance in your 529 account. Your balance is composed of principal and earnings, each of which should be detailed on your statement. There is no tax or penalty on the withdrawal of your principal, but the earnings portion of your balance will be taxed as ordinary income and will be subject to a 10% penalty. Note that all withdrawals are composed of both earnings and principal; you cannot withdraw just your principal. A simple example can illustrate the concept. Assume that you have $50,000 left in a 529 account, which is comprised of $30,000 of principal and $20,000 of earnings. Liquidating the account would produce ordinary income of $20,000 and a penalty tax of $2,000. Assuming a combined tax bracket of 35%, the total tax owed on the distribution would be $9,000. While individual circumstances will vary, the total tax owed is likely not very different from what would have been paid over time had the funds been saved outside of the 529 account.

Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser with offices in Boston, Massachusetts, Atlanta, Georgia, Hernando, Florida, and Westwood, New Jersey. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered/notice filed or qualifies for an exemption or exclusion from registration/notice filing requirements. For additional information about Modera, including our registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov). A full description of the firm's business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV.

This article is limited to the dissemination of general information regarding Modera's financial planning and investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Such general information is not suitable for everyone. Accordingly, this article should not be construed as a solicitation to effect, or attempt to effect, transactions in securities or as the rendering of personalized investment, tax or financial planning advice. Nothing herein should be interpreted as legal, tax or accounting advice. You should contact your tax advisor, accountant and/or attorney before making any decisions with tax, accounting or legal implications. The information herein was accurate as of the date it was written but is subject to change without notice based on changes in the governing laws or other factors. Past performance is no guarantee of future results, and there is no guarantee that the issues and opinions expressed herein will come to pass.

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