How to make the most of leftover 529 college savings account money

As families try to offset the increasing cost of college education, many have turned to 529 college savings plans as a strategy. 

These accounts let families set aside money toward college expenses while taking advantage of tax breaks and compound interest, according to certified financial planner Preston D. Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin. He is also a member of the CNBC Financial Advisor Council.

“If you start [investing] at the child’s birth, then you have 18 years to make money on top of money. And hopefully, that’s enough to outpace inflation of the price of college,” Cherry told CNBC. 

Families have invested $441 billion in such accounts as of the end of 2023, according to Morningstar, a 16% increase from 2022. When it comes to paying for college, 35% of families used 529 funds in 2024, according to Sallie Mae. For the average family, that money covered 9% of the cost of attendance.

But what happens if you have leftover 529 funds?

“A student may get some scholarships or need-based financial aid. Or, sometimes, grandparents or other family members contribute to college expenses,” Cherry said.

Education choices can also result in a surplus. Figures show fewer students are earning bachelor’s degrees, while more are earning certificates due to growth of vocational programs.

Your unused money does not have to stay locked up in the 529 college savings account, Cherry said. Here are four ways to make the most of it: 

Thanks to Secure Act 2.0, savers now have the ability to roll money from a 529 plan to a Roth individual retirement account, free of penalties or income tax. The measure, which took effect this year, gives Americans more flexibility with their 529 accounts. 

“We, meaning the parents, saved and invested for your college education,” Cherry said. “We have excess funds that we didn’t use for you, but we still want to benefit your life. So we’re going to roll it over from one compound tax-deferred vehicle, a 529, to another.

“One pays for your college, the other is an investment into your future retirement,” he added.

This option has limitations, however.

To qualify for a transfer to a Roth IRA, the 529 account must have been open for 15 years. Plus, there is a lifetime cap on 529-to-Roth rollovers of $35,000. 

Depending on how much money you want to transfer, it may be a multiyear project. The conversion counts toward your annual IRA contribution limit. For 2024, that is $7,000 for investors under age 50.

If you feel certain the original beneficiary of the 529 plans will not need the leftover funds, say, for grad school, it is possible to change the account beneficiary to another “qualified family member.” That might include a sibling or step-sibling or parent, among other relatives, according to the IRS.

Changing a 529’s beneficiary does not trigger withdrawal fees or any tax penalty. 

Another way to use leftover 529 funds is to pay off student loans, Cherry said. Under the Secure Act of 2019, savers can use funds for this purpose: up to $10,000 per year for each plan beneficiary, as well as for each of the beneficiary’s siblings. 

As a last resort, Cherry said, families could withdraw 529 assets outright.

Your contributions can be withdrawn tax- and penalty-free, while any earnings not used for qualified expenses may be subject to income tax and a 10% penalty. An exception: If your child receives scholarships, you can withdraw up to the amount of that scholarship for nonqualified expenses without penalty.

This allows families to have immediate access to the money, rather than redirecting it to another account or putting it toward a qualified education expense. 

“They could use the monies for themselves, to fund their current lifestyle or transfer that money into another saving and investment account for the future,” Cherry said.