Beneficiary Strategies for 529 Plans

September 16, 2015

529 plans can be an attractive vehicle to save for higher education expenses.  The plans are tax deferred while invested, and withdrawals that are paid directly to an accredited post-high school program are tax free.  Plans can be established from any state or private program regardless of where you live or plan to go to school.  However, now that these plans have been around for many years, some of the first wave of parent investors are tripping over a new problem. What do you do if you over-funded a 529 plan? Generally, 529 plans will only let you change beneficiaries to another family member which might limit your options for excess funds.  There are a few strategies to consider, however, if you realize a plan has grown more than enough to pay for Junior’s college plans:

1. Change the beneficiary.  The owner on the account retains control and can change beneficiaries as many times as the plan allows as long as it is to a member of the same family. If you have another child that can benefit, the easiest solution is to change the beneficiary of the remaining 529 funds.  Of course, the beneficiary can only use the funds to pay for education.

2. Plan for Life Long Learning.  A 529 plan can fund many different accredited post-high school education programs.  If you have an adult family member such as yourself, your spouse, a mother, father, aunt or uncle that wishes to pursue continuing education of any kind, you may be able to use the excess 529 funds to pay for their pursuits.

3. Exchange funds with family members.  If you have a close relative that is still funding their 529 plans, perhaps you can discuss an exchange.  You designate your extra funds to their child and receive the cash they planned to invest.

4. Withdraw the excess funds and pay the penalties.  It is possible to make non-qualified withdrawals from  a 529 instead of sending the money to a school. However, the gains on your investments will be taxed as ordinary income with an additional 10% penalty tax.

  • You might consider making a withdrawal by having the funds sent as a check to your young adult beneficiary already on the 529.  The withdrawal will then be reported as their income, and taxed at a presumably much lower ordinary income tax rate.

529 plans offer an easy way to save for higher education.  They have limitations as to investments, beneficiaries and flexibility.   For these reasons they are not always the best choice as some families are now finding out.  As with any investment vehicle, do your research on the right plan for your family and seek advice to help you with the best choice for your unique circumstances.