Unused 529 Funds? Here Are Your Options

You’ve saved money for years, your children have graduated from college, and now you have unused funds in 529 accounts. What are your options?

You have a few options that don’t involve taking a taxable nonqualified withdrawal and incurring an additional tax penalty.

Save for future education

Your child may be through college now, but may decide later that he or she wants to take additional course work to help achieve career goals or pursue an advanced degree such as a master’s program or law school. The funds will be available for that purpose.

Change the beneficiary

The account’s beneficiary may be changed to someone who is a member of the family of the original beneficiary. That includes siblings, nieces, nephews, grandchildren, and even you if you would like to take a class at an eligible educational institution.[1]

Penalty-free withdrawals

Did your child earn a college scholarship? Is he or she attending a U.S. service academy? If so, you can withdraw money—in the year the scholarship was awarded up to the amount of the scholarship or during the attendance at a service academy—from your 529 account without paying the 10 percent federal tax penalty. You will still need to pay taxes on earnings. The UESP Program Description has more details on other circumstances that permit you to withdraw funds without paying a penalty.

Nonqualified withdrawals

Qualified withdrawals cover expenses including tuition and mandatory fees; computers, peripheral equipment, educational software, and internet access; books, supplies, and required equipment; and room and board for students enrolled at least half-time.

Funds withdrawn from an account that are not used for qualified higher education expenses are subject to taxes and tax penalties.

No federal taxes or tax penalties apply to the principal, or what you contributed to the account. However, earnings on the principal are subject to income taxes and a 10 percent federal tax penalty. Also, a Utah taxpayer must add back any Utah state income tax credit or deduction claimed in prior years.

[1] If a Utah taxpayer account owner/agent changes an account’s beneficiary from someone who was younger than age 19 at the time the beneficiary was designated on the account to someone who is age 19 or older, the account owner must recapture
(add back) Utah state income tax credits or deductions claimed in any prior tax year. These taxes must be paid in the year such a change is made. See the Program Description for more information.