What Is a 529 Plan?

A 529 plan is a tax-advantaged investment account designed to hold funds to be used for a beneficiary’s (such as a child’s or grandchild’s) qualified educational expenses. After-tax money is placed into the account and grows tax-free through investing. Once the money is needed, it can be withdrawn tax-free for the qualified education expenses of the beneficiary, such as tuition and fees, most room and board expenses, books and supplies, and computers and other technology. The beneficiary can also use these funds to pay up to $10,000 toward their existing student loans. If money is withdrawn for nonqualified expenses, it is subject to income tax and a 10 percent penalty (with some exceptions).

What Happens If There Are Unused Funds?

Getting an education can be expensive, which is why many people are motivated to set up or contribute to 529 plans for their children and grandchildren. Like a standard investment account, money is put into the 529 plan with the hope that it will grow over time and result in enough money to cover some or all of the beneficiary’s educational expenses. If the cost of the beneficiary’s education is less than the amount that has been saved in the 529 account—perhaps the beneficiary has received more in scholarships than they anticipated, for example—there may be funds left over. Now, instead of withdrawing the unused money from the account and paying income tax and a penalty or trying to find a new beneficiary to which you can transfer the remaining funds, the leftover funds can be rolled over into a Roth IRA for the beneficiary.