Unused 529 funds? Here are your options
You’ve helped your clients save money for years, their children have graduated from college, and now they have unused funds in 529 accounts. What are their options?
They have a few choices that don’t involve taking a taxable nonqualified withdrawal and incurring an additional tax penalty. (As always, see the Program Description for full information.)
Save for future education
Your clients’ children may be through college now, but they may decide later that they want to take additional course work to help achieve career goals or pursue an advanced degree such as a master’s program or law school. The funds can be used for that purpose.
Change the beneficiary
Does your client need the my529 funds for another child? The account’s beneficiary may be changed to someone who is a member of the family of the original beneficiary. That includes siblings, nieces, nephews, grandchildren, and even your client if they would like to take a class at an eligible educational institution. Changing the beneficiary to a member of the family also would not create any tax implications.
Did your client’s child earn a college scholarship? Are they attending a U.S. service academy? If so, your client can withdraw money—in the year the scholarship was awarded up to the amount of the scholarship or during attendance at a service academy—from their 529 account without paying the 10 percent federal tax penalty. Your client will still need to pay taxes on the earnings portion of the withdrawal. The my529 Program Description has more details on other circumstances that permit the withdrawal of funds without paying a penalty.
Trusts can own my529 accounts. The trust can include my529 account funds in its succession plan for estate planning purposes.
Qualified withdrawals cover expenses including tuition and mandatory fees; computers, peripheral equipment, educational software, and internet access; books, supplies, and required equipment; and room and board for students enrolled at least half-time.
Funds withdrawn from an account that are not used for qualified higher education expenses are subject to taxes and tax penalties.
No federal taxes or tax penalties apply to the principal. However, earnings on the principal are subject to income taxes and a 10 percent federal tax penalty. Also, a Utah taxpayer must claim the amount of a nonqualified withdrawal as income for the year in which it was taken.
Utah taxpayers who are account owners must add back the amount of a nonqualified withdrawal as income on their Utah state income tax form for the taxable year when:
- A withdrawal was not used for qualified higher education expenses or eligible K-12 tuition expenses;
- Funds were transferred from an account whose beneficiary was younger than age 19 when he or she was designated on the account to a beneficiary who was age 19 or older when designated on the account; or
- A rollover was made to another 529 plan.
The addback must be made in the same year as the nonqualified withdrawal, beneficiary change, transfer, or rollover was made.