The Responsible Investor

What do Do With a 529 Balance?

In my previous blog post about college payment strategies, I discussed the many ways families can approach paying for college—whether through 529 plans, brokerage accounts, income, or financial aid strategies.

The goal was to create a thoughtful, tax-efficient plan to meet one of life’s biggest expenses. But what happens when that planning works out even better than expected?

Watching your child earn a college diploma is a proud moment for any parent. It also marks another milestone: no more tuition bills. After years of saving, planning, and carefully deciding how to fund education, you may now find yourself in a new position:

What happens if there’s money left over in your child’s 529 plan?

If you followed a thoughtful funding strategy—balancing 529 withdrawals, taxable accounts, and tax credits like the American Opportunity Credit—you may have preserved more of your savings than expected. That’s a good problem to have. And fortunately, 529 plans offer more flexibility than many families realize.

Here are several smart ways to make the most of those surplus education savings.

Keep Paying for School

If your newly minted graduate is pursuing an advanced degree, this is the most straightforward path. 529 funds can continue to be used tax-free for qualified expenses like tuition, fees, books, and even room and board for graduate programs.

Name a New Beneficiary

If grad school isn’t in your child’s future, the most straightforward option for surplus funds is to assign the 529 account to a new beneficiary. You can change beneficiaries with no penalties or tax consequences, but the person must be related to the original beneficiary by blood, marriage, or adoption.

The definition of “family member” is broader than many expect and can include siblings, first cousins, in-laws, and stepparents. You can even name yourself as the new beneficiary and spend the funds on your own continued education. That means the funds can stay within the family and continue to be used efficiently for education.

Repay Student Loans

A few things to bear in mind: Most, but not all, student loans qualify. Private student loans must meet several criteria to be included in the program. For example, they must have been used solely for qualified education expenses for a degree or certificate program at an institution eligible for Title IV federal student aid. And they can’t be personal loans from a family member or a loan from a retirement plan.

Also, 529 plans are run by states, and their rules don’t always align perfectly with federal legislation. We can help you check your 529 to see whether withdrawals for student loan payments will trigger any state tax penalties.

Roll Over Funds Into a Roth IRA

One of the more recent planning opportunities comes from the SECURE 2.0 Act.

If your 529 plan is at least 15 years old, you can transfer up to $35,000 into a Roth IRA in the beneficiary’s name with no taxes or penalties. There are a few important limitations:

• Annual rollovers are capped at the Roth IRA contribution limit ($7,000, or $8,000 if age 50+)
• The beneficiary must have earned income at least equal to the rollover amount
• Contributions to other IRAs reduce how much can be rolled over in a given year

For families thinking long-term, this can be a powerful way to jump-start retirement savings for the next generation.

Take a Nonqualified Withdrawal

If you spend 529 funds on nonqualified expenses, you’ll be charged federal income tax and a 10% penalty on the earnings portion of your withdrawal. While doing so isn’t always ideal, it is an option—and sometimes, it may be the best one.

For example, if you face a pressing financial need and your only other choice is to take on high-interest debt, paying the taxes and penalties on a nonqualified 529 withdrawal may be less expensive in the long run.

It’s also possible that the earnings portion is small enough to render the penalty insignificant. Let’s say you had $500 dollars left in the account, with contributions accounting for $420. In that case, only $80 would be subject to taxes and penalties. You might decide it’s worth taking the hit to be able to close the account and move on.

A Natural Next Step in the Plan

In our previous discussion, we focused on how to efficiently fund education—balancing tax advantages, financial aid considerations, and long-term goals like retirement. This next phase is simply a continuation of that same thoughtful planning process.

The key is not just how you save for college—but how you adapt once the goal is achieved.

529 plans were designed with flexibility in mind. With the right strategy, leftover funds can continue to support your broader financial picture, whether that’s funding future education, reducing debt, or even building retirement savings for your child.

If you’re unsure which option makes the most sense for your situation, we’re here to help you make a decision as you evaluate the trade-offs with your long-term goals.

And to all the recent graduates—and the families who supported them along the way—congratulations on reaching this important milestone.

Learn more about Derek Van Calligan

Hello! I’m Derek, a senior wealth advisor and director of investment research at Allodium Investment Consultants, located in Minneapolis, MN. I am passionate about helping individuals and families build holistic financial plans to help them reach their goals. When I’m not helping our clients make investment decisions, I enjoy spending time in the mountains in Colorado—skiing, fishing and hunting with my wife, Kelly, and my son, Archie. I am also an active church member and volunteer at Big Brothers Big Sisters and Junior Achievement.

The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.