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What to do About Unused Funds in a 529

What to do About Unused Funds in a 529

March 15, 2024

You planned and saved well enough to fund your child’s educational expenses.  Whether due to overfunding or investment outperformance, the beneficiary’s 529 account now holds a remainder balance which will not be used by the beneficiary.  What can you do with this money while avoiding or minimizing taxes and penalties?

Qualified Redirections of 529 Funds


Solutions Which Avoid Taxes and Penalties

Non-qualified distributions from a 529 account incur an excise penalty of 10% on the earnings portion of the distribution which is also subject to income taxation.  The tax and penalty are payable by the recipient of the distributed funds. There are, however, several ways to redeploy the unused funds without incurring either penalty or income tax.


Non-Qualified Withdrawals of 529 Funds


Solutions to Manage Taxes

Non-qualified withdrawals cannot avoid the 10% excise penalty on earnings.  There is, however, recourse that can be taken to manage the taxable impact of unqualified distributions on the account owner.

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