Many parents save for their child’s college education using a 529 account. But what happens if you “over-fund” the account and save too much?

If you are lucky enough to have this problem, you have three options:

  1. Reassign: You can reassign the 529 account to a direct relative without any tax consequences. This includes nieces, nephews, cousins, aunts, uncles, or even yourself, for future education goals.
  2. Withdraw It (and Pay the Penalty): If you withdraw the money for non-educational purposes, you’ll pay state and federal income tax on the gain, as well as a 10% penalty (+ a 2.5% if you live in California). Non-qualified distributions payable to the beneficiary (the child) are taxed at the beneficiary’s tax rate. Non-qualified distributions payable to the parent are taxed at the parent’s ordinary income rate.
  3. Save It: By not withdrawing the money, you allow the investments to grow tax free. You can then withdraw the money in a lower-income year. Alternatively, the money can be left alone for the child’s graduate school or a future grandchild’s education costs.

The takeaway is that there isn’t a penalty for leaving extra money in a 529 plan after a student graduates.


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The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.