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You stashed thousands of dollars in a 529 college savings plan so your child can attend college. But what happens to the unused 529 funds if your child decides not to go to college, gets a full scholarship, picks a much less expensive school than you expected, receives an appointment to a military academy, or otherwise doesn’t need all the money you saved?

If you’re not careful, you could be hit with a big federal income tax bill and an IRS penalty if you have leftover 529 funds. Fortunately, though, there are a few things you can do with the unused funds to avoid the extra taxes and penalties.

With some of the options, you’re just kicking the can down the road and will eventually have to spend the money on education expenses. But you can also use the leftover money to pay down student loan debt, cover the needs of a disabled person, or even save for retirement.

While not knowing what to do with unused funds in a 529 plan is a good problem to have, it can still be difficult figuring out which is the right path for you. But don’t worry too much. We’ll help you understand each available option so you can make the right choice for you and your family.

Related: 11 Education Tax Credits and Deductions for 2023

How Do 529 Plans Work?

college savings piggy bank coins esa 529 coverdell

Before getting into what to do with leftover funds, let’s go over some of the basic rules governing 529 college savings plans.

When a 529 plan account is opened, the account owner must name a beneficiary for the account. The beneficiary is typically a child or grandchild, but you can open a 529 account for anyone—even for yourself. You can only have one beneficiary for each 529 plan account, so parents with multiple children must open a separate account for each kid.

There are no federal income tax breaks for putting money in a 529 plan (although a state tax deduction or credit might be available), but money in the account grows tax-free. Plus, you don’t pay taxes on distributions from the account if the money is used to pay the beneficiary’s “qualified education expenses” (we’ll discuss these expenses in a minute).

In addition, even if a 529 plan is used to pay for a student’s education, the student or the student’s parents can still claim the American Opportunity tax credit or the Lifetime Learning credit. However, the same expenses can’t be used for both benefits.

However, if 529 plan funds aren’t used for approved education costs, any earnings withdrawn from the account are taxed at the same federal tax rates as wages, tips, taxable Social Security benefits, and other “ordinary” income.

You can also be hit with a 10% penalty for a non-qualified distribution, although exceptions apply (as described below).

Qualified Education Expenses for 529 Plan Purposes

Qualified education expenses for 529 plan purposes are generally the costs required for the beneficiary’s enrollment or attendance at any college, university, vocational school, or other postsecondary educational institution eligible to participate in a federal student aid program administered by the U.S. Department of Education. An eligible school can be a private college, out-of-state or in-state public college, community college, graduate school, trade school, and more.

Approved expenses include college and other higher education costs for:

  • Tuition and fees
  • Computers, software, and internet access
  • Books
  • Special needs equipment
  • Room and board (for students enrolled at least half-time)

However, you can’t use money from a 529 plan to pay for:

  • Extracurricular activities
  • College application fees
  • Health insurance
  • Transportation
  • Other costs not directly related to the beneficiary’s education

You can also use up to $10,000 per year of 529 funds for the beneficiary’s tuition at a public, private, or religious elementary or secondary school (i.e., kindergarten through grade 12). Note, however, that you can’t use money in a 529 plan to pay fees or for other related expenses for K-12 education.

Money in a 529 plan can also be used to cover fees, books, supplies, and equipment required for the beneficiary’s participation in an apprenticeship program certified by the U.S. Secretary of Labor.

Waiver of 10% Penalty

Although income taxes must still be paid, the 10% penalty for a non-qualified distribution doesn’t apply if a 529 account’s beneficiary:

  • Dies
  • Becomes disabled
  • Attends a U.S. military academy
  • Earns tax-free scholarships or fellowship grants
  • Receives veterans’ educational assistance, employer-provided educational assistance, or any other tax-free payments as educational assistance

The penalty is also waived if 529 plan funds are included in income only because qualified higher education expenses were taken into account in determining the American Opportunity tax credit or Lifetime Learning tax credit.

529 Plans From Backer

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  • Available: Sign up here
  • Price: Flat fee of $1.99 per contribution

Consider Backer if you’re looking for a great 529 plan. It’s easy for your family and friends to play a role in saving for your child’s education with their 529 savings plan. In fact, they’ve helped families save more than $30 million toward college in just minutes.

You can use the 529 plan to put your child on track to afford college; all while remaining invested in an asset class that will grow over time.

Backer allows you to invest in a portfolio of low-cost index funds that track major indexes of large company stocks (S&P 500), small-cap stocks (Russell 2000) international company shares (MSCI EAFE Index), and U.S. government bonds (Barclays Aggregate Bond Index).

Related: Best Alternatives to 529 Plans [Other College Savings Options]

What Can You Do With Leftover Money In a 529 Plan?

529 plan written on blackboard next to cash

Now that you know more about how a 529 plan works—including the consequences of not using money in a 529 plan for qualified expenses—let’s explore your options if you end up with leftover 529 funds.

Assuming you want to avoid the tax and penalties that go along with taking a non-qualified distribution, here’s our list of things you can do with unused money in a 529 plan.

1. Transfer Unused 529 Funds to a Family Member’s 529 Plan

Leftover 529 plan funds can be transferred to a family member’s 529 account without triggering any taxes or penalties. You can also simply change the beneficiary to a member of the original beneficiary’s family.

However, taxes and penalties will still be due if the money eventually is used for something other than qualifying educational expenses.

2. Transfer Unused 529 Funds to a Family Member’s ABLE Account

Excess funds in a 529 plan can also be moved to a family member’s ABLE account, which is a savings account for people with disabilities.

However, if you’re transferring money from a 529 plan to an ABLE account, make sure you don’t exceed the ABLE account’s annual contribution limit.

Related: Best Savings Accounts for Kids

3. Rollover Unused 529 Funds to a Roth IRA

Starting in 2024, a beneficiary can transfer up to $35,000 of leftover money in a 529 plan into a Roth IRA in his or her name. A Roth IRA is a retirement savings account that lets you withdraw money on a tax-free basis when you’re retired.

There is one catch—the 529 account must have been open for at least 15 years.

In addition, as with transfers to an ABLE account, be mindful of the annual Roth IRA contribution limits and income restrictions.

Related: Roth IRA vs. 529 Plan: Which Is Better For College Savings?

4. Pay Student Loan Debt With Unused 529 Funds

Money in a 529 plan can be used to pay up to $10,000 of a beneficiary’s student loan debt (either principal or interest). It can also be used to pay up to $10,000 of student loan debt owed by the beneficiary’s sibling (including a stepbrother or stepsister).

The $10,000 cap is a lifetime limit, not an annual one. It’s also a per beneficiary limit, not a per account limit. Payment of a sibling’s student loan counts against the sibling’s lifetime limit, not the beneficiary’s limit.

There’s a negative impact on the student loan interest deduction, though. To prevent “double dipping,” the deduction is reduced by the amount of student loan interest paid with the tax-free earnings portion of a 529 plan withdrawal. However, the student loan interest deduction is not reduced by interest paid with that part of a 529 plan withdrawal representing contributions to the account.

5. Leave Unused 529 Funds In Your Account

Since there’s no time limit on using money in a 529 plan, you can always leave excess funds in a 529 plan account to use in the future. The beneficiary might eventually decide to take additional courses, attend graduate school, or even pass the leftover funds on to children of their own.


Rocky has been covering federal and state tax developments for over 25 years. During that time, he has provided tax information and guidance to millions of tax professionals and ordinary Americans. As Senior Tax Editor for Young and the Invested from Jan. 2023 to Feb. 2024, Rocky spent most of his time writing and editing online tax content.

Before working for Young and the Invested, Rocky was a Senior Tax Editor for Kiplinger, where he wrote and edited tax content for Kiplinger.com, Kiplinger’s Retirement Report and The Kiplinger Tax Letter. Prior to his time at Kiplinger, Rocky was a Senior Writer/Analyst for Wolters Kluwer Tax & Accounting. In that role, he managed a portfolio of print and digital state income tax research products, led the development of various new print and online products, authored white papers and other special publications, coordinated with authors of a state tax treatise, and acted as media contact for the state income tax group (where he was quoted as an expert by USA Today, Forbes, U.S. News & World Report, Reuters, Accounting Today, and other national media outlets). Before that, Rocky was an Executive Editor at Kleinrock Publishing, which provided tax research products for tax professionals. At Kleinrock, he directed the development, maintenance, and enhancement of all state tax and payroll law publications, including electronic research products, monthly newsletters, and handbooks.

Rocky has a law degree from the University of Connecticut and a B.A. in History from Salisbury University.