What to do with leftover funds
What if you don’t need all that money for school after all? If your child received a scholarship, you can still access the money up to the amount of the scholarship free of penalty. But you will have to pay taxes on the earnings. Or perhaps your child is attending a more affordable school, or room and board expenses are less than expected.
Before taking withdrawals for anything besides education, consider other options. Is your child planning on grad school? Your account can continue to grow and be used for those costs. If the child’s expenses are covered, the funds can be transferred to a 529 savings plan for a different beneficiary. You're even allowed to withdraw money for a younger beneficiary's K-12 tuition. However, the earnings may not be exempt from state taxes, so talk to a financial professional before making your decision.
In 2019, the SECURE Act included provisions that allow 529 funds to be used for payments toward the principal and interest of a qualified student loan (up to a $10,000 lifetime maximum per individual) for the beneficiary and each of the beneficiary's siblings.
The SECURE 2.0 Act of 2022 has now expanded on that flexibility. Beginning in 2024, unused funds held in a 529 account can be rolled over to a Roth IRA (individual retirement account) for the beneficiary if the account meets certain requirements. Penalty-free rollovers can be made if the account has been open for more than 15 years, and the amount to be rolled over must have been in the account for a minimum of five years. This rollover allowance has a $35,000 lifetime cap per beneficiary.