Leftover money in a 529 plan is more common than you think. Scholarships, lower‑than‑expected tuition, military academies, or gifts from relatives can all leave you with extra funds after college costs are covered.
What happens to unused 529 funds? You can either withdraw the money, which may trigger taxes and a 10% penalty on earnings if it’s a nonqualified distribution, or repurpose it for future qualified education expenses and other penalty‑free uses.
Below are six legitimate ways to use leftover 529 funds while minimizing taxes and penalties.
Reasons for unused funds in a 529 college savings plan
You might have leftover 529 money for a few different reasons. The beneficiary may have:
- Chosen a college where tuition was cheaper than expected, such as an in-state public college or a U.S. military academy
- Passed away or developed an illness that stopped them from continuing their education
- Received a substantial scholarship
- Decided not to go to college or dropped out
- Received inheritance money from relatives
Ways to use leftover 529 funds
1. Transfer the 529 plan funds to another beneficiary
One of the great things about 529 plans is that they allow you to change the beneficiary to another qualifying family member without tax consequences. This is a no-brainer if you have another child who will attend college or want to help pay for your niece or nephew’s private K-12 education. When deciding on a beneficiary, be sure not to skip generations, which could trigger a federal tax penalty.
Parents may even consider making themselves beneficiaries since they can use 529 plans to pay for continuing education. Qualified expenses for 529 plans include tuition and fees from most universities and community colleges, as well as Outward Bound wilderness and leadership courses.
Savingforcollege.com founder Joe Hurley used his kids’ leftover 529 plan savings to earn a Finger Lakes Community College horticulture certificate. He now runs Kettle Ridge Farm in Victor, NY, where his bees produce pure maple syrup and local honey!
2. Save the 529 plan funds for your child’s future educational needs
Remember, just because your child or grandchild decides not to pursue a traditional four-year degree doesn’t mean they won’t ever need education funding again. You might consider keeping funds in a leftover 529 plan account in case your child wants to:
- Resume college education later
- Continue to a graduate or professional program
- Change their major and pursue a different field of study
3. Use the money to make student loan payments
The SECURE 2.0 Act allows families to take tax-free 529 plan distributions to pay off student loans. Both principal and interest payments toward a student loan are considered qualified higher education expenses. However, the portion of student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
You can pay up to $10,000 in qualified student loan repayments each per 529 plan beneficiary and their siblings (brother, sister, stepsiblings). A 529 plan savings account owner may change the 529 plan beneficiary at any time without tax consequences.
Since 529 plans do not have time limits, students may continue contributing to them throughout college or after graduation and use any leftover funds to repay student loans tax-free.
4. Save the 529 plan for a grandchild
There is no time limit on when you have to spend your 529 plan savings. This creates an opportunity to leave unused money as an educational legacy to your grandchildren.
What’s more, your tax advisor may one day recommend you use a 529 plan as an estate-planning tool. 529 plans offer a unique opportunity since the value is removed from your taxable estate, but you retain control of the account. The IRS treats contributions as gifts for tax purposes, meaning deposits up to $19,000 per individual in 2025 ($18,000 in 2024) qualify for the annual exclusion.
5. Take advantage of penalty-free scholarship withdrawals
Sometimes, you can take a nonqualified withdrawal without paying a penalty tax on the earnings, such as when the beneficiary dies, becomes disabled, or attends a U.S. Military Academy. Additionally, if your child gets a scholarship, you can withdraw up to the amount of the award to spend on anything you like.
However, you must pay income tax on the earnings portion of the account. As mentioned above, you can save the money for future use or for another beneficiary to avoid paying taxes.
6. Roll over up to $35,000 to a Roth IRA retirement account
Effective January 1, 2024, you may transfer 529 account funds to a Roth IRA to boost retirement savings thanks to the SECURE Act. To qualify for a transfer, you must maintain the account for at least 15 years, and the amount you must have contributed to the account for at least 5 years prior. The Roth IRA also must be that of the 529 account’s designated beneficiary.
While the regulations cap the transfer amount at a lifetime limit of $35,000, the Roth IRA annual contribution limit ($7,000 in 2025 for those under 50) will still apply. Beware: The IRS has yet to set clear guidelines on the Roth IRA rollover, so you may wish to check with an accountant or other financial professional before attempting this transfer.
Conclusion
If you’re worried about what to do with unused 529 funds, you can rest assured knowing you can save them for the future and even withdraw them tax-free under certain circumstances.
But if you decide to withdraw money, check out our guide on how to withdraw 529 money first!
See also:
- What is the Penalty on an Unused 529 Plan?
- Avoid These 529 Plan Withdrawal Traps
- How to Transfer 529 Plan Funds to a Sibling?
