What to Do with an Unused 529 Plan

Let’s start with the question many parents quietly worry about, and something I get asked a lot as you come in for meetings or grab us on the side of different events, is “what happens if we save too much for college?”. Maybe our child gets a scholarship, they choose a different, cheaper school, or they skip college entirely. Many parents have been plagued by this.

Unknown of what if we put too much into a 529 plan and we don’t use all of it? What happens? A recent rule change has started to change that equation for us, and make these plans a little bit more flexible. And in some cases, what started as a college planning tool turns into kind of a launching pad as a retirement account.

So let’s take a step back. And in 2024, we’ve all heard about the Secure Act, specifically Secure Act 2.0 that was passed. And that changed a lot of rules for RMDs, retirement accounts, etc. what it also did is it opened up the door for 529 plans. What I’m specifically referring to, is it allows us now to convert a portion of unused 529 plans over to a Roth IRA in the name for that beneficiary.

Keeping with the tax free growth, we’d take this college account and we turn it into a nice tax free retirement account. So here’s kind of the headlines or the main points. And we’ll come back to these. So you don’t have to pause and write them down. The lifetime maximum is $35,000. So it’s not a free for all. We do have that maximum $35,000 for lifetime.

It’s a tax free and it’s a penalty free transfer which is fantastic. It does have to follow the Roth IRA contribution rules. So we have to have earned income. And we can only contribute up to the annual contribution each year up to that lifetime maximum. So again there’s some fine two rules here. Also we have to have that plan around for 15 years.

So if we just started it not going to be available to us, it does have to exist for a certain period of time, but it does start to give us a back-up plan and answer that “what if” question of what if we don’t use all of those plans? We do now have an option to move these funds into other positions.

So it’s kind of think about the math for a second. So if we graduate college, say we’re 22, we have this unused 529 plan, we slowly convert this over to a Roth over a few years. So let’s say it’s done within you know, we’ll say by 25. And our retirement goal is 45. Well, we have a very long period of time that this money can kind of season there in that Roth account.

And if you assume an 8% growth rate, that account could potentially turn into close to $1 million without ever having to add contributions to it, simply taking advantage of that compounding growth. To me, that’s powerful. Okay. So again, let’s take a step back. What are some of the rules around this kind of recap. Well, one is we have to have that seasoning period.

Right. Has to be around for 15 years. We have to have that lifetime and annual contribution number to be aware of. And we have to also have that earned income component. So it’s not again, a free for all or unlimited, but it does give us some options. Now there’s other things we can do with the unused 529 plans.

You know, we can always move these plans and change the beneficiary to siblings, other grandkids, cousins. We do have some flexibility. Over the last few years. They have really changed the rules on these plans, and they’ve made them a lot more available and how we can use the funds so you can use them for trade programs, you can use them for certification programs, apprenticeships, even continuing education.

So for me, as an example, I have my CFP certification. When I went through that program, you weren’t allowed to use 529 plan funds, but those are expensive programs. So if you have kids or grandkids working on a CPA or their CFP or CFA or whatever alphabet soup of designation you want to pick, you can actually use these plan funds to pay for those programs, which tend to be pretty expensive pieces to it.

So the real takeaway is, you know, when we’re saving for kids, college is often this battle of saving for college or retirement. To be clear, retirement planning still comes first. However, there are loans we can take for college. We can’t really take loans for retirement. But this new rule allows us to use these 529 plans, potentially jumpstart retirement planning for the next generation.

I almost think of it, it’s kind of morphed into this multi wealth planning tool as opposed to simply just an education planning tool. And I don’t know anything that you don’t know, but I do think that they’re going to continue to broaden and change these rules and make these plans more expensive or more flexible because of the rising cost of education.

So if you’re saving for a grandchild and or a child, the conversation around 529 plans, in my opinion, has changed.