Wealth Planning Insights
What To Do with Excess 529 Plan Funds
Keith Fenstad, CFP®, June 2025
529 education savings plans are one of the most effective tools for funding future education expenses. But what happens when there’s money left over?
Maybe your child received a scholarship, chose a less expensive school, or simply didn’t use the full balance. Whatever the reason, we often hear from clients who are wondering what to do with those unused 529 plan funds.
Thanks to evolving legislation and flexibility in 529 rules, there are several ways to repurpose these dollars—without triggering excessive taxes or penalties.
Here are some of the most practical options:
Change the Beneficiary
One of the built-in advantages of a 529 plan is the ability to change the beneficiary to another qualifying family member—income tax and penalty free. This can include:
Siblings
Cousins
Parents or grandparents
Even yourself (the account “owner”)
This is often the simplest solution if you have more than one child or want to help a relative with their education expenses. Note that there are gifting implications if the new beneficiary is in a lower generational level.
Use for Graduate School or Future Learning
Just because undergraduate studies are done doesn’t mean their education is. 529 funds can be used for graduate or professional degrees, trade schools, certain certifications, and even some continuing education.
Some families hold on to remaining balances for future learning opportunities, especially if the beneficiary is still early in their career.
Pay-Down Student Loans
The Secure Act of 2019 approved the use of up to $10,000 per beneficiary (and another $10,000 per sibling) to repay student loans. This lifetime cap was introduced to provide families with a tax-free way to reduce debt, even if traditional education expenses are complete.
Rollover to a Roth IRA
This is a really interesting new possibility. Thanks to the SECURE Act 2.0, beginning in 2024, 529 balances can be rolled into a Roth IRA for the 529 beneficiary, subject to a few important rules:
The 529 must have been open for at least 15 years.
Any contributions made in the last five years are ineligible for rollover.
The beneficiary must have earned income in the year of the rollover.
Rollovers are subject to the annual Roth IRA contribution limit ($7,000 in 2025).
There is a lifetime rollover limit of $35,000 per beneficiary.
While $35,000 may not seem like a lot, if invested early and allowed to grow tax-free over decades, it can grow to a meaningful number. In many ways, this option turns unused education dollars into a powerful jumpstart for retirement.
Use the Funds Yourself
If you (the account owner) are contemplating a return to school—whether for career growth or personal enrichment—you can change the beneficiary to yourself. It’s a creative but completely allowable use of the funds. An art collection course in Paris might be in your future.
Withdraw the Excess (Last Resort)
If none of the above options make sense, you (or the beneficiary) can always simply withdraw the unused money. Only the earnings portion of a non-qualified withdrawal is subject to income tax and a 10% penalty. The original contributions are never taxed or penalized.
The income tax responsibility falls with whoever receives the funds – either the account owner or beneficiary. If early in their working career, a non-qualified distribution to the beneficiary may be taxed in a very low tax bracket.
Note however, if the funds are being withdrawn because the beneficiary received a scholarship, the 10% penalty is waived (though taxes still apply to earnings).
Many clients are unaware of the flexibility they have with leftover 529 balances. Whether it’s helping other children in the family, supporting financial independence, or maximizing long-term wealth opportunities there are several options to consider.
As always, your Tanglewood advisor is here to help evaluate those options and create a plan that fits your unique situation.