Four Ways To Use Leftover 529 Money

Option 1: Think Beyond Tuition

Before considering other options, it’s worth double-checking that you’ve fully exhausted your qualified expense options – after all, funds from a 529 can be used for a lot more than tuition. These other qualified expenses may include:

• Books, supplies and any equipment required for enrollment
• Room and board
• Meal plans
• Off-campus housing and food
• Computers, computer equipment, internet services and required software for enrollment

It’s also important to make sure your 529 withdrawals match up in the same calendar year as your qualifying education expenses are paid. Account owners should maintain all transaction records, bills and receipts associated with a 529 withdrawal.

If you’ve accounted for all qualified expenses, know that your 529 plan can be a source of funding for nonqualified expenses too, like buying a car or home or taking on an expensive project like a kitchen remodel. Just keep in mind that this option comes with both federal and state tax implications that are worth evaluating with your Financial Advisor.

Your Baird Financial Advisor can work with you to determine how this would impact your tax bill and if it would be an effective solution for your situation.

Option 2: Reallocate the Funds to Family

Transferring 529 funds for a family member who would have a use for them will help you spend down the account without tax or penalties. Qualifying family members are those within the beneficiary’s immediate and extended family, including:

• Parents and stepparents
• Siblings and stepsiblings
• Children, stepchildren and foster children
• First cousins
• Aunts and uncles
• Nieces and nephews
• In-laws
• Spouses of the above-mentioned relatives

Note that if the recipient of these funds is in a younger generation than the designated beneficiary, the funds may be considered a gift for tax purposes.

As you think about family members who might benefit from these funds, remember that 529s can be used for any postsecondary education – which includes trade, vocational and graduate school. Families can also use the funds to pay for up to $10,000 of tuition per year for an elementary or secondary school.

Option 3: Pay Off Federal and Private Loans

As a part of the SECURE Act of 2019, 529 funds can be used to pay down student loan debt with a lifetime limit of $10,000, tax-free. While both principal and interest payments toward a student loan are considered qualified education expenses, the portion of student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. With this in mind, it could be beneficial to withdraw funds from your 529 account immediately after graduation to pay off the principal of your loans before interest payments hit.

This provision also allows account holders to pay off student loans borrowed by the beneficiary and their siblings, without needing to change the name of the beneficiary.

Option 4: Roll Excess Funds Into a Roth IRA

The SECURE Act’s successor, the SECURE Act 2.0 (passed in 2022), made key changes to how excess 529 funds can be used as well – stating that account owners could now roll 529 funds into a Roth IRA. However, this rollover can only be completed if a few key rules are followed:

• The 529 account must have been opened for at least 15 years
• Only the account balance from five years before the rollover date can be transferred
• The beneficiary of the Roth IRA must be the same beneficiary of the 529 account

As an example, a rollover done July 1, 2024, must come from a 529 plan opened prior to July 1, 2009, and the amount to be rolled over would come from the contributions and earnings dated by July 1, 2019.

Along with the above, there are also additional requirements around how you can make your contributions to the Roth IRA:

• Any 529 rollover amount is subject to the annual IRA contribution annual limits. For example, the Roth IRA contribution limit in 2025 is $7,000. If $2,000 had already been contributed to the Roth IRA that year, you could only contribute up to $5,000 from your 529.
• Transfers are capped at a lifetime total of $35,000.
• The beneficiary’s earned income cannot be less than the rollover amount.

Given that the 529 rollover into a Roth IRA is a relatively new provision, more guidance is expected to come from the IRS in the future. Consider connecting with your Baird Financial Advisor who will have the latest information to inform your strategies.