Financially Speaking: Don’t Waste Your 529
By Fred Dunbar
As I sit down to write today, taxes are due in 45 days. Hopefully, by the end of this article you will better understand the benefits of converting unused 529 plan assets to support your children’s or grandchildren’s future – even their retirement.
Over the past 40 years, college tuition rates have increased at a substantially higher rate than inflation. Concerned about these rising costs, states began developing innovative programs to help parents and grandparents save for education. In 1996, 529 plans were officially created by Congress as part of the Small Business Job Protection Act. Section 529 was added to the Internal Revenue Code to encourage college savings by providing tax-deferred growth on earnings used for qualified higher education expenses. Although state-sponsored prepaid tuition plans began in 1986 (with Michigan leading the way), 529 plans became widely popular in 2001 when tax-free withdrawals for qualified college expenses were introduced.
Approximately 25 years ago, a client called me from the hospital, overjoyed by the birth of his first grandchild. He wanted to set up a custodial investment account with $25,000 for his new grandson. I congratulated him and suggested we speak the following week, once things settled down. When we spoke again, I pointed out that since he had four children, he would likely have more than one grandchild, and what he did for one, he might want to do for all. He agreed. Today, he has 13 grandchildren. After discussing various investment options, I suggested opening a 529 plan and contributing annually on each grandchild’s birthday and at other special occasions such as Christmas, First Communion, and more. He followed that approach and has contributed uniformly to each account.
The question he and most clients have asked over the years is: What happens if a child or grandchild doesn’t use all the funds for qualified education expenses?
As many of you know, 529 plans are a powerful, tax-advantaged college savings tool. However, many families end up with unused funds. This can happen if a beneficiary (the individual who benefits from the plan, not the owner) decides not to attend college, attends at a lower cost than expected (it happens), enrolls in a military academy, or receives scholarships.
Fortunately, today’s 529 rules offer flexible and tax-efficient options for leftover funds.
Change the beneficiary (tax-free)
The account owner may transfer unused funds to another qualifying family member without triggering taxes or penalties. Eligible beneficiaries include siblings, parents, children, nieces, nephews, cousins, or even yourself.
Save the funds for future education
529 plans have no time limits for withdrawals. Unused funds can remain invested and grow tax-deferred for graduate school, professional programs, community college, or vocational training.
Use funds for expanded K–12 education expenses
Federal rules allow up to $10,000 per beneficiary annually for K-12 tuition (this increased to $20,000 as of January 1, 2026, under new law).
Cover apprenticeship program costs
529 funds may be used tax-free for registered apprenticeship programs, including fees, equipment, and supplies. Programs must be registered with the U.S. Department of Labor.
Pay down student debt
The SECURE 2.0 Act of 2022 allows up to a lifetime amount of $10,000 per beneficiary (and per sibling of that beneficiary) to be used tax-free for qualified student loan payments.
Transfer funds to an ABLE account
If the beneficiary, or a qualifying family member, has a disability, 529 funds can be transferred to an ABLE account without taxes or penalties. These accounts support long-term financial independence while preserving eligibility for federal disability benefits.
Withdraw funds penalty-free for scholarship amounts
If the beneficiary receives a tax-free scholarship, you may withdraw up to that amount without the 10% penalty. However, income tax on earnings still applies.
Take a nonqualified withdrawal (least tax-efficient option)
You can withdraw leftover funds for any purpose. Keep in mind, the earnings portion will be taxed as ordinary income and subject to a 10% penalty, unless an exception applies (such as disability, death, or scholarship).
Roll over unused funds to a Roth IRA
This is a newer and highly valuable option. Beginning in 2024, families can roll over unused 529 assets into a Roth IRA owned by the beneficiary tax- and penalty-free if the following conditions are met:
Lifetime rollover limit: $35,000.
Annual limit: Subject to Roth IRA contribution limits.
The 529 account must be at least 15 years old.
Funds must have been in the account for at least 5 years.
The beneficiary must have earned income equal to or greater than the rollover amount.
The rollover must be completed as a direct trustee-to-trustee transfer maintained for the benefit of the beneficiary.
Note: A distribution made after Dec. 31, 2025, and before April 15, 2026, that is rolled into a Roth IRA by April 15, 2026, and designated for 2025 will be reported as a 2025 Roth IRA contribution.
Most families underestimate how flexible 529 plans have become. Today’s expanded rules allow unused funds to support education, career development, disability needs, and now even retirement planning.
Additionally, you can significantly reduce the value of your taxable estate by funding a 529 plan. Contributions are generally removed from your estate and treated as gifts to the beneficiary. For 2026, the annual gift exclusion is $19,000 per individual. You may also “front-load” a 529 plan by contributing up to $95,000 (or $190,000 for married couples) in a single year and averaging the gift over five years without incurring gift taxes.
It’s truly remarkable how 529 plan rules have evolved. If you have children or grandchildren, consider opening and funding a 529 plan to help secure their future.
As always, consult with your CPA or tax advisor regarding your specific situation.
Now that you’ve explored ways to use unused 529 funds, grab your favorite book, chair, and beverage, and head to the beach to start working on your summer tan.
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is the former President of Common Cents Planning. Fred’s team may be contacted at 610-361-0865, by e-mail at info@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342. Investment advisory services offered through Planning Directions, Inc., d/b/a Common Cents Planning a Registered Investment Adviser. Fixed insurance products and services are separate from and unrelated to Common Cents Planning.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice. Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results. All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.
