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Dear College Money Guru,
If my grandchild's college expenses end up upon her graduation to be less than the amount in her 529 plan, what
specifically are the options for using the leftover amount?
-- Frank
Dear Frank,
I'm assuming that you are the 529 account owner, which means that the decision about what to do with the leftover
funds belongs to you. There are four options available.
First, you can replace the current beneficiary with another member of the beneficiary's family.
You'll simply be redirecting the use of the leftover 529 money to a brother, sister, first cousin, etc. The
definition of "family member" is actually quite broad and also includes the beneficiary's father, mother, aunt,
uncle, and son or daughter, as well as any of their spouses.
You can even change the beneficiary to yourself or your wife. For example, you could spend the
money on adult education classes at your local community college.
Your second option is to withdraw the leftover funds as a nonqualified distribution for your own
noneducational use. However, you will owe ordinary federal tax along with an additional 10 percent penalty tax on
the earnings portion of the distribution. You'll probably owe state income tax as well. You may be able to avoid
the 10 percent penalty if you can attribute the withdrawal to tax-free scholarships received by your grandchild.
Third, you can direct your 529 plan to make the withdrawal payable to your grandchild as the
beneficiary. This way, the earnings and any penalty are reported on your grandchild's tax return. He or she will
then have the net amount to use for a home purchase or any other purpose.
Your final option is to do nothing. No one is forcing you to take action with respect to your 529
account just because your grandchild has graduated from college. You can simply keep the account going, taking
further advantage of tax-deferred growth, and choose any of the first three options at any time in the future.
If you were to die, the successor
owner named on your application will assume the
decision-making authority over the account. Conceivably,
the account could continue to live through several
generations of beneficiaries, although you should
look into the gift-tax and generation-skipping
transfer tax consequences of moving the 529 money
between generations.
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