What to Do with Leftover College Savings Plan Funds By Reuters

By Amy Haimerl

DETROIT (Reuters) – Melissa Byers and Rich Rauh started saving for their sons’ college education through 529 college savings accounts soon after their births.

When their oldest son graduated from the University of California, San Diego, he still had funds left in his account. However, their younger son, who chose to attend Chapman University, a private institution with higher tuition costs, required more than what was available in his 529 plan.

To address this, the couple, residing in Lake Forest, California, utilized the flexibility of 529 plans that initially attracted them: they simply changed the beneficiary on the account from one son to the other without incurring any taxes or penalties.

“You can’t give it to your next-door neighbor, but it is tremendously flexible for your immediate family,” commented Young Boozer, the Alabama state treasurer and chairman of the College Savings Plan Network, which serves as an information hub for state-administered college savings programs.

Money saved in a 529 plan grows tax-free as long as it’s used for qualifying college expenses and other educational activities.

One lesser-known feature allows the plan owner to change the beneficiary once a year, provided the new beneficiary is a family member. Funds in a 529 plan can cover tuition, room and board, mandatory fees, and even essential items like books and computers.

Some states offer tax deductions for contributions to their state-sponsored 529 plans, while various state agencies and educational institutions also serve as sponsors.

The owner of a plan doesn’t have to be a parent of the beneficiary; funds can be transferred to other family members, including siblings, parents, spouses, aunts, uncles, nieces, nephews, and even cousins. However, if the account is held by a godparent or someone unrelated, the new beneficiary must be a relative of the previous beneficiary.

BECOMING YOUR OWN BENEFICIARY

The frequency of beneficiary changes in 529 plans is somewhat unclear. However, Loreen Gilbert, president and founder of WealthWise Financial Services in Irvine, California, mentions that she often discusses transfer options with her wealth management clients. “There is a lot of interest, especially from grandparents,” she noted. “Many want to contribute without incurring gift taxes, and the 529 is a great way to do that.”

Choosing from over 100 available plans can be overwhelming. While 529 plans have been around for two decades, only 2.5 percent of families owned one as of 2015, a slight decrease from 3.1 percent in 2007. The average balance in the nation’s 12.3 million accounts is about $21,000, according to the Federal Reserve.

Both Boozer and Gilbert suggest starting with the 529 plan from your home state, as some provide tax benefits for residents. For instance, certain states allow full deductions for contributions, while others may have limitations or offer no tax benefits at all.

When evaluating 529 plans, performance, tax benefits, and costs should be key factors, according to Gilbert. Additionally, some states provide bankruptcy protection for these accounts, adding another layer of security.

Planning for a child’s education can feel like a gamble, raising questions about what to do if no family member needs the funds in a 529 plan. If that situation arises, the account owner can designate themselves as the beneficiary and use the money for college or vocational courses.

“There are even cruises you can take,” Gilbert added. “As long as it’s through an accredited institution, there are many ways to utilize the funds legally.”

Byers is simply relieved that both of her sons are nearing the completion of their studies. Her younger son, Brian, is gearing up for his senior year, which he postponed for five years to pursue a career in minor league baseball with a professional organization. His older brother, Jeff, also played minor league baseball.

Once he finishes, Brian will owe his parents a bill, just like his older brother. “Our philosophy was that we were going to front the money for college, but they were going to pay half of it back,” said Byers, who works as a veterinarian.

So, what will she do with the money they repay? “Save for our retirement,” she replied.