Key takeaways

• Using 529 funds for non-qualified expenses can trigger income taxes and a 10% penalty on earnings.
• You can leave the money invested for grad school — there’s no deadline to use the funds.
• Beneficiaries can be changed to a sibling or relative generally without tax consequences.
• Up to $35,000 can be rolled into a Roth IRA for the beneficiary (subject to rules).
• Other options include funding K–12 tuition or saving for future grandchildren.

There can be tax consequences if 529 funds are used to pay for anything other than qualified education expenses. Consider speaking with a financial  professional about the best strategy for your family’s situation if you have an overfunded 529 account.

With outstanding student loans now exceeding $1.7 trillion, there’s a big emphasis on what can be done to relieve families of the burden of student loan debt. However, some families face another problem — they saved too much money in a 529 college savings plan. While that may seem an unlikely possibility for some, it does happen. For example, if you’ve saved enough to cover four years of private schooling in a 529, and your child decides to go to a community college for a couple years and then transfer to a state school, you could end up with remaining funds in your account.

Why is this a problem? There are tax consequences if 529 funds are used to pay for anything other than qualified education expenses.

Granted, this is a good “problem” to have for many people — it’s certainly much better than racking up tens or even hundreds of thousands of dollars in student loan debt. But what are your alternatives if your child has finished college (or decided not to attend college) and there’s money left over in your 529 plan?

Read more: Student loans hit Gen Z—monthly payments now over $500

6 options to consider for an overfunded 529 plan

1. Keep the money in the account to pay for grad school later

Leaving the remaining funds in the 529 is one option. Many young adults decide to pursue advanced education after obtaining a four-year undergraduate degree. There’s no timeline dictating when 529 funds have to be withdrawn, so if there’s a chance your child may want to go to graduate school later, you can just leave excess 529 funds alone.

As an added benefit, the money may continue to grow on a tax-deferred basis as long as it remains in the account.

2. Change the beneficiary

529 plans offer a lot of flexibility in terms of beneficiary designations. If you have more than one child and there’s leftover money in your oldest child’s 529 when he or she graduates, you can simply change the beneficiary designation to your younger child. This could enable you to contribute less money to your younger child’s account and reallocate some of these funds to retirement savings instead.

Similarly, you could change the beneficiary to a member of your extended family, such as a niece or nephew. You could even change the beneficiary to yourself and use the money to go back to school and get a graduate degree or attend a vocational-technical school if you want.

State tax treatment of beneficiary changes may vary. In some states, changing the beneficiary could result in state tax consequences or recapture of prior state tax benefits.

3. Rollover to a Roth IRA

Thanks to the Secure 2.0 Act, there’s another option for people to consider with overfunded 529 plans. Starting in 2024, you can roll money from a 529 plan into a Roth IRA established in the name of the beneficiary. With this option, there are a few rules to keep in mind:

• The 529 plan must have been open for more than 15 years.
• You’re limited to rolling over a lifetime max of $35,000 from a 529 plan to a Roth IRA.
• The annual maximum you can contribute to a Roth IRA in 2026 is $7,500. So, under current contribution limits it would take you about 5 years to roll over the $35,000 lifetime limit. Remember that IRA contribution limits may increase in future years.
• The beneficiary must have earned income at least equal to the amount rolled over for that year.
• Contributions to the 529 plan within the last 5 years (and the earnings on those contributions) are ineligible to be rolled to a Roth IRA.
• State tax treatment of rollovers may vary.

Read more: School rules: College savings can help fund your retirement

4. Save the money for grandchildren

Since there isn’t a deadline requiring you to withdraw 529 funds by a certain date, you can leave the money in the account for your children’s children. You would simply designate a grandchild as the new beneficiary once he or she is born.¹ This is a great way to get an early start on college savings for your grandkids, which your children will no doubt greatly appreciate.

5. Look into penalty-free non-qualified withdrawal options

There are several scenarios in which you can make non-qualified 529 plan withdrawals and avoid paying the 10% penalty.² These include the death or disability of the beneficiary and the decision by the beneficiary to attend a U.S. military academy. Also, if your child receives one or more scholarships, you can withdraw up to the scholarship award amount and use the money for non-education related expenses without paying the 10% penalty.

Keep in mind that while you won’t have to pay the tax penalty in these situations, you will still have to pay tax on earnings in the account at your ordinary income tax rate.

6. Use the money to pay for private K-12 education expenses

The Tax Cuts and Jobs Act included a beneficial provision for families saving money in 529 plans by allowing these funds to be used to pay for private secondary school education expenses. If there’s leftover money in your older child’s 529 when he or she graduates, you can use it to send your younger child or children to a private elementary, middle or high school. However, state tax treatment may differ. Some states do not conform to federal rules and may impose state income taxes or recapture previously claimed state tax deductions for K–12 withdrawals. Check your state’s rules before taking a distribution.

Read more: What can 529 funds be used for? Get a Sense Check

Our take

If none of these strategies work for you, your last option may be to simply withdraw the money and pay the income taxes and penalty that are due.³ Remember that taxes and penalties are only assessed on earnings (although state income taxes may apply if you previously received a state tax deduction or credit on your 529 contributions), so the tax bite might not be as painful as you think.

If you have an overfunded 529 account, consider speaking with a financial  professional about the best strategy for your family’s situation.