How To Get the Most Out of College Savings Accounts

Taking on Tuition

Going to college in the U.S. is expensive, and planning ahead with a dedicated savings vehicle, such as a 529 plan, can really pay off.

The 529 plan in particular is useful because it’s tax-efficient: Withdrawals are not taxed when used to pay qualified education expenses. Even better, not only parents can contribute (for the next time a grandparent or relative asks for a gift idea).

But what happens if there are leftovers in a 529 account after the beneficiary finishes their education?

Eating up Leftovers

There are several ways to use up leftover 529 funds, even if you or your child is no longer attending school.

One of the simplest solutions is also one of the newest. As of this year, Americans can roll funds from a 529 plan into a Roth individual retirement account (IRA), tax- and penalty-free. But there are some caveats: the 529 plan must have been open for at least 15 years, the rolled-over funds must have been in it for at least five years and will count toward the IRA’s federal annual contribution limit, the beneficiaries must be the same across accounts, and only $35,000 in total can be rolled over this way. That might sound like a lot of terms and conditions, but it’s still a great way to repurpose the leftover funds.

Another option is to effectively “hand down” the 529 plan. A plan’s beneficiaries can be changed from one qualified family member to another, such as siblings.

Finally, there are some qualified education expenses that only crop up after graduation, such as student loan payments. Funds from a 529 can be used to pay off up to $10,000 in student loan debt per year.

Understanding the Options

More than a third (35%) of American households are using 529 plans this year, according to data from Sallie Mae. But on average, those funds cover just 9% of the cost of attending college for each household, CNBC reported.

It may be that these plans are underutilized because they are misunderstood. A 529 plan’s usefulness doesn’t start and stop with college. With a proper understanding of the available options, these wealth-building tools can be used from elementary school through retirement, or even for generations to come.

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