I am a teacher at Smart Start Georgia, where I work with students of all ages to help them develop their skills and learn how to be successful in life. If the account is not transferred to a family member or other beneficiary within ten years, the account must be distributed and the earnings will be subject to income tax. In fact, if you didnt meet your investment objectives before your child started college or you dont think your current balance will cover their qualified higher education expenses, just keep contributing until it does. What Happens to a 529 Plan When Your Child Turns 21? There are a few exceptions to the 30-year rule. Most states allow anyone who contributes to a 529 plan, including a grandparent, to claim a state income tax deduction or tax credit. We discussed some of those above. Some plans allow you to open an account with as little as $25 or $50. After all of the sacrifices and saving you dealt with, you now have a 529 account with money left in it. Access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. With 529 plans, theres even a way for someone feeling really generous (hello, grandparents?) However, its accuracy, completeness or reliability cannot be guaranteed. Unauthorized access is prohibited. Helping You Tackle Personal Finance Challenges. Hes planning on retiring early to travel the country in an RV, while dedicating his time to helping others with their finances. Yes, you can roll a 529 plan into an IRA, but there are some things you need to know first. Report on the Economic Well-Being of U.S. In 2021, gifts of up. There are also total contribution limits, as contributions are not supposed to exceed what a beneficiary would spend on education. 529 prepaid plans are different, as they are essentially a futures contract promising you that future tuition will be covered by money contributed now. Savingforcollege.com has an easy online tool for determining if a particular school qualifies. Households in 2018 - May 2019, Biannual Report on the Assets and Education Field. What Happens To A 529 Plan If Your Child Doesn't Go To College For many people, the advantages, including favorable tax treatment, will outweigh any downside, including potential penalties for early withdrawals or for using the money in a way that is not approved. The U.S. government has given favorable tax treatment to so-called 529 plans for 25 years. This flexibility gives you a lot of options. Just like the prior section stated, that left over money can only be used for qualified expenses for education purposes. Is it a one semester scholarship or a 4 year scholarship? Money saved in a 529 plan generally grows tax-deferred at the federal level. What happens if I dont use all my 529 money? While there are always some exceptions, the parents or guardian need to give permission for any withdrawals from the account. You can move money between plans as often as once a year for any reason. With the coronavirus canceling college classes, you could be due a refund. The rules for 529 plans vary from state to state, but in most cases, the account can be used for any post-secondary education expenses, including tuition, room and board, and books. If there are 2 parents, each can give $16,000. Rent is generally not considered an education-related cost, but there are a few exceptions. So what happens to your college savings? You must have earned income and you cannot be over the income limits. If the student is using the plan to pay for other education-related costs, such as books or tuition, the rent cannot be included. 529 Plan Basics - Fidelity However, she can establish her own account by naming herself as account owner and beneficiary. The 529 account can also be transferred to a different states plan, but there may be some penalties for doing so. how to meet the challenge of increasing college costs. Before detailing what happens to your 529 plan when your child turns 21, it's important to note the benefits of a 529 plan when saving for education expenses. And there are no takebacks. 529 plans are state-sponsored college savings plans that allow families to save money for college tax-free. Even assuming relatively weak performance of 4% annually over 29 years a tax-deferred account will still outperform an equivalent taxable investment for those in a tax bracket of 22% or higher, even with the penalty. And recent tax laws give you even more options. Also, these are contribution limits, not limits on total growth of the account. That includes not only four-year colleges and universities but also qualifying two-year associate degree programs, trade schools, and vocational schoolsboth at home and abroad. What Happens If You Dont Use Up Your 529? While this "set and forget" option is popular, it is not without its detractors, some of whom argue that it is too conservative (opens in new tab), given the rising cost of higher education. If your child doesn't use the 529 Plan savings, you have three options: you can keep the money in the account in case your child changes his or her mind in the future, change the account beneficiary or make a nonqualified withdrawal. Here, your chances of loss are close to zero, but now you risk not having the money you put aside grow quickly enough to keep up with the rising cost of education. After she turned 18, I closed that account and opened up a money market account at a bank and set it up under both of our names so I could still administer the funds for her. Finally, you can avoid taxes on a 529 withdrawal by rolling it over into another 529 plan.