What to Do If You’ve Overfunded a 529 Plan

Saving for your child’s education with a 529 plan is a smart financial move. These tax-advantaged accounts are designed to help families set aside money for qualified education expenses—and when everything goes as planned, those funds grow tax-deferred and are withdrawn tax-free for eligible costs.

But what if your child earns a full scholarship, doesn’t attend college or trade school, or simply doesn’t need the full balance in the account? It’s more common than you might think—and fortunately, there are several options for putting that extra money to good use.

Traditional Options for Unused 529 Funds

If you find yourself with excess funds in a 529 plan, here are a few long-standing strategies:

1.    Change the beneficiary

You can transfer the account to another qualifying family member without tax penalties. This could be a sibling, cousin, or even yourself if you're considering further education.

2.    Leave the funds in the account

There’s no rush to withdraw the money. You may find a use for it in the future—such as graduate school, continuing education, or a family member’s future educational needs.

3.    Take a non-qualified distribution

You can withdraw the funds for non-education expenses, but the earnings portion will be subject to income tax and a 10% penalty. The original contributions, however, can be withdrawn tax- and penalty-free.

New Options Under SECURE 2.0

The SECURE 2.0 Act, effective beginning in 2024, provides two new, flexible ways to repurpose leftover 529 funds:

1.    Pay off up to $10,000 in student loans

529 plan funds can now be used to repay qualified student loan debt—up to a $10,000 lifetime limit per beneficiary.

2.    Roll over up to $35,000 to a Roth IRA

In certain cases, 529 assets can be rolled into a Roth IRA for the beneficiary—without penalties or taxes. To qualify:

• The 529 account must have been open for at least 15 years

• Contributions (and earnings) made in the last 5 years are not eligible

• The rollover amount is subject to the annual Roth IRA contribution limits

This provision allows excess 529 funds to help jump-start retirement savings for the beneficiary—turning a college savings plan into a long-term financial planning tool.

Consider State and Gift Tax Implications

While these federal options are promising, it’s important to consider how your state treats 529 plan withdrawals and rollovers. Additionally, if you're transferring funds to another beneficiary, be mindful of federal gift tax rules. Read this blog on gift tax for more information.

The Bottom Line

Having more money in a 529 plan than you need isn’t a bad problem—but it does require some thoughtful planning. If you’re unsure which option makes the most sense for your family’s situation, consult your tax advisor. At Aldridge Borden, we’re here to help you make informed, tax-efficient decisions about your education savings.