15 Oct What should we do with these leftover college savings?

Q. We have changed how we invested for college over the years. Now everything, almost, is in a 529 plan. We also have two Education IRAs that literally have less than a dollar in them — when we transferred money out over the years, I guess we left a smidge. Can I just take out that money without putting it into a 529 plan — our kids are done with school — or what do we do?
— Mom

A. We’re glad you’re assessing what to do with this leftover money rather than just let it sit there.

Let’s start with the basics.

A 529 plan is a qualified tuition plan which enables tax-advantaged savings for higher education costs, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

“The funds that are invested grow tax-deferred and withdrawals can be made without tax or penalty for tuition, room, board and other approved expenses,” she said.

An Education IRA, now known as a Coverdell Education Savings Accounts or ESAs, are similar in that no taxes are paid for qualified distributions for education-related expenses, Mott said.

“The remaining balance in the ESA accounts can be rolled into the existing 529 plans so long as the beneficiary is the same or into a 529 for another qualified family member,” Mott said. “The account could be moved into another ESA for another child or eligible family member under the age of 30,” she said, noting that ESAs must be closed when the named beneficiary turns 30.

Mott said the balance will be paid out and both income taxes on the distribution amount and a 10% penalty on the earnings will be due, and the distribution amount will be reported on the individual’s 1040 and they will receive a 1099-Q.

Both accounts could be closed with the understanding that the proceeds would be considered taxable income and a 10% penalty would be assessed on the earnings,” she said.

Morr said one advantage of moving the balances into the existing 529s is that these accounts are now eligible to fund Roth IRAs for the named beneficiaries as a result of Secure Act 2.0 passed at the end of 2022.

“Up to $7,000 (2024 limit) could be rolled into a Roth IRA for the beneficiary of the 529,” she said. “At present, there is a lifetime limit of $35,000 that can be moved from the 529 to the Roth. Each year, as the annual IRA contribution limit is adjusted, the amount that can be converted will as well.”

The 529 accounts could also be retitled and passed on to another family member such as a sibling, son- or daughter-in-law, grandchild, aunt, uncle, niece, nephew or cousin, Mott said.

Also note the use of 529 funds has been expanded beyond just the costs associated with college and may be of benefit to one of these family members, Mott said.

“The accounts can now be used to cover expenses for eligible institutions and programs such as community college, trade schools and apprenticeships,” she said. “In addition, up to $10,000 may now be used for tuition costs at a qualified private, public or religious K-12 school.”

And finally, Secure Act 2.0 also allows for 529 funds to be used to pay off student loan debt up to $10,000.

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This story was originally published in October 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.