Retirement & Financial Planning Report

If there is still money in a tax-favored 529 account after paying the beneficiary’s college costs, what can be done with that money?


* The funds can be rolled into another 529 account for a different beneficiary without tax consequences, as long as the new beneficiary is a family member of the old beneficiary, in the same or a higher generation.

However, if the new beneficiary is in a younger generation, there will be gift tax consequences. Apparently, the gift would be from the old beneficiary to the new beneficiary; the old beneficiary could use a gift tax exclusion or exemption to avoid paying tax.

* The money could be distributed to the original beneficiary, for purposes other than college costs. That beneficiary will owe income tax, probably at his or her tax rate, plus a 10 percent penalty on any earnings.

* The money could be distributed to the account owner, who would owe income tax and the 10 percent penalty on any earnings.


* The money can be left in that account, growing tax-deferred. In many 529 plans, there are no restrictive rules on how long the funds can remain there.