Options for extra 529 college savings

Q. My kids are done with college and I’m lucky – they got scholarships and went to schools that were less expensive than I thought they would be. We have $57,000 split between two 529 Plans. What are the options for that money?
— Oversaved

A. You are lucky, indeed.

You have several choices for the leftover 529 money.

One of the great things about 529 plans is that they allow you to change the beneficiary to another qualifying family member without tax consequences, said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna.

You can use the funds for family members, such as another child who will attend college, or if you want to help pay for niece’s or nephew’s degree.

“When you’re deciding on a beneficiary, just be sure to avoid skipping generations, which could trigger a tax penalty,” Meckler said. “Parents interested in continuing their own education can even make themselves the beneficiary.”

You don’t have to use the funds immediately.

If your children later decide they want to pursue a graduate degree or other professional program, you can save the funds and use them in the future, Meckler said.

You can also use the funds future generations.

Meckler said another great benefit of 529 plans is that there is no time limit on when you have to spend your savings. This creates an opportunity for you to leave any unused money as an educational legacy to your grandchildren, he said.

What’s more, your tax advisor may one day recommend you use a 529 plan as an estate-planning tool.

“529 plans offer a unique opportunity since the value is removed from your taxable estate but you’re able to retain control of the account. Contributions are treated as gifts for tax purposes,” Meckler said.

If you decide the withdraw the funds for non-qualified expenses, you can always take a non-qualified withdrawal.

Because your contributions were made with after-tax money, they will never be taxed or penalized, Meckler said. Any earnings on your investments, however, will be subject to income tax as well as a 10 percent penalty, he said.

“Unlike your Roth IRA, you’re not permitted to take a principal-only withdrawal from your 529 plan,” Meckler said. “Each withdrawal is made up of contributions and earnings, so if there are gains in the account you will pay taxes and a penalty on every non-qualified distribution.”