Excess 529 Savings
Having too much money in an account that is a problem that I am sure all of us would love to have. It's not common, but can happen when you have saved money in a specific account for a specific purpose. The college 529 saving account is one such account. If the person who the account was created for has completed their higher education, there may be a nice "nest egg" remaining in the account.
This current Wuhan Covid 19 virus pandemic has changed the way many parents, students and others are looking at college. The focus on a college education may be reduced, replaced by a focus on career training in a trade school. Not only is that a better choice for many individuals, it may dramatically reduce the amount of money used for higher education. In that setting, a surplus of funds in a 529 plan may be a reality for more and more people.
In his article, David Crossman, senior portfolio manager for Bedel Financial Management reviews some of the options that can be used when excess 529 funds become available. The following is his article, and the original posting in Inside Indiana Business can be viewed via this link.
Excess 529 Money...Hmmm, What to Do?
You diligently saved to a 529 account over the years and watched the balance grow. Now the beneficiary of that account has graduated from college – congratulations! Looking at the latest statement, you see that their 529 account still has a balance. What should you do with that money? Importantly, what can you do with that money?
Is Grad School on the Horizon?
If the recent grad is considering graduate school, it may make sense to leave the account as is. Depending on their time horizon, you might want to invest the account more aggressively – most accounts are very conservatively invested while the beneficiary is in school to avoid large drops in value right when you need the money the most. Odds are the residual balance won’t be enough to cover the full cost of graduate school, but every little bit helps. You can also continue to make contributions to the account if you wish – a very attractive option for Indiana residents due to the generous state tax credit available.
Repurpose for a Younger Sibling
If you have other children planning to attend college, you can make one of them the beneficiary of the 529 (an account can only have one beneficiary at a time). There are no penalties or tax consequences for making this change. This is very helpful if the younger sibling does not have enough in their 529 to cover their college expenses. Once the change is made, you may pay qualifying college expenses for the new beneficiary from the account.
Widening the Net
If there are no siblings that need the money, you can look further out on the family tree. The list of qualified family members to whom a plan beneficiary may be changed is quite extensive (parents, grandparents, aunts, uncles, nephews, nieces, first cousins, etc.). Just like with siblings, switching to a qualified family member entails no taxes or penalties.
Thinking Longer Term
If none of these options are appropriate, you can leave the account in place to eventually change the beneficiary to a grandchild. A 529 account cannot have an unborn child as the beneficiary, but you can change the beneficiary once the child is born. You can leave your child as the beneficiary for now and change when and if the birth occurs. Again, you will likely want to alter how the account is invested – an unborn child has a pretty long time horizon before the funds are needed, so you can be more aggressive.
Show Me the Money!
If you personally need the money, you can withdraw some or all of the balance. Since this would not be for a qualified education expense, there are consequences. The withdrawal would be subject to income taxes and an additional 10% penalty. The taxes and penalty only apply to any earnings in the account; any return of principal is neither taxed nor penalized.
For example, let’s say your child’s 529 account has $10,000 left in it. The $10,000 consists of $4,000 in contributions and $6,000 in earnings. If you withdraw the entire amount, you would owe taxes plus the 10% penalty only on the $6,000 of earnings. Depending on your situation, that might be worth it.
Summary
Having money left over in a 529 account may be viewed as a problem, but it is a problem most of us would love to have!
David Crossman is a Senior Portfolio Manager with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email David.
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Note: WCRM is not responsible for the content of Mr. Crossman's article, nor for any action you take, or don't take, based on his article's information.
