6 Ways to Spend Unused 529 Funds (Without Incurring Penalties)

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Kathryn Flynn

By Kathryn Flynn

March 15, 2024

Believe it or not, some families have leftover funds in a 529 plan when their child finishes college. A student may win a scholarship, attend a U.S. military academy, or receive unexpected gifts or inheritances from relatives, leaving them with more money than they need to pay for college.

But have you ever wondered what happens to unused 529 funds? You have two options: Withdraw the money or save the unused 529 plan funds for future qualified education expenses.

Don’t worry; leftover 529 money is common, and you can still make the most of the funds after graduation. Today we’ll discuss common reasons for unused 529 funds and six common strategies for spending them with minimal tax consequences.

Reasons for unused funds in a 529 college savings plan 

You might have leftover 529 money for a few different reasons. The beneficiary may have: 

  • Chosen a college where tuition was cheaper than expected, such as an in-state public college or a U.S. military academy
  • Passed away or developed an illness that stopped them from continuing their education
  • Received a substantial scholarship
  • Decided not to go to college or dropped out
  • Received inheritance money from relatives

Ways to use leftover 529 funds

1. Transfer the 529 plan funds to another beneficiary

One of the great things about 529 plans is that they allow you to change the beneficiary to another qualifying family member without tax consequences. This is a no-brainer if you have another child who will attend college or want to help pay for your niece or nephew’s private K-12 education. When deciding on a beneficiary, be sure not to skip generations, which could trigger a tax penalty.

Parents may even consider making themselves the beneficiary since they can use 529 plans to pay for continuing education. Qualified 529 plan qualified expenses include tuition and fees from most universities and community colleges, as well as Outward Bound wilderness and leadership courses.

Savingforcollege.com founder Joe Hurley used his kids’ leftover 529 plan savings by earning a horticulture certificate from Finger Lakes Community College. He now runs Kettle Ridge farm in Victor, NY, producing pure maple syrup and local honey from his bees!

2. Save the 529 plan funds for your child’s future educational needs

Remember, just because your child or grandchild decides not to pursue a traditional four-year degree doesn’t mean they will ever need them again. You might consider keeping funds in a leftover 529 plan account in case your child wants to:

  • Resume college education later
  • Continue to a graduate or professional program
  • Change their major and pursue a different field of study

A good place to start:

See the best 529 plans, personalized for you

3. Use the money to make student loan payments 

The SECURE 2.0 Act allows families to take tax-free 529 plan distributions to pay off student loans. Both principal and interest payments toward a student loan are considered qualified higher education expenses. However, the portion of student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.

You can pay up to $10,000 in qualified student loan repayments each per 529 plan beneficiary and their siblings (brother, sister, stepsiblings). A 529 plan savings account owner may change the 529 plan beneficiary at any time without tax consequences.

Since 529 plans do not have time limits, students may continue contributing to them throughout college or after graduation and use any leftover funds to repay student loans tax-free.

4. Save the 529 plan for a grandchild

There is no time limit on when you have to spend your 529 plan savings. This creates an opportunity to leave unused money as an educational legacy to your grandchildren.

What’s more, your tax advisor may one day recommend you use a 529 plan as an estate-planning tool. 529 plans offer a unique opportunity since the value is removed from your taxable estate, but you retain control of the account. Contributions are treated as gifts for tax purposes, which means deposits up to $18,000 per individual will qualify for the annual exclusion (in 2024).

5. Take advantage of penalty-free scholarship withdrawals

In some cases, you can take a non-qualified withdrawal without having to pay a penalty tax on the earnings, such as when the beneficiary dies, becomes disabled, or attends a U.S. Military Academy. Additionally, if your child gets a scholarship, you can withdraw up to the amount of the award to spend on anything you like.

However, you will incur income tax on the earnings portion of the account. To avoid paying taxes, you can save the money for future use or another beneficiary, as mentioned above.

6. Rollover up to $35,000 to a Roth IRA retirement account

Effective January 1, 2024, 529 account funds may be transferred to a Roth IRA to boost retirement savings. To qualify for a transfer, the account must be maintained for at least 15 years, and the amount transferred must have been contributed at least 5 years prior. The Roth IRA also must be that of the 529 account’s designated beneficiary.

While the transfer amount is capped at a $35,000 lifetime limit, the Roth IRA annual contribution limit ($7,000 in 2024 for those under 50) will still apply. Beware: the IRS has yet to set clear guidelines on the Roth IRA rollover, so you may wish to check with an accountant or other financial professional before attempting this transfer.


If you’re worried about what to do with unused 529 funds, you can rest assured knowing you can save them for the future and even withdraw them tax-free under certain circumstances. 

But if you decide to withdraw money, check out our guide on how to withdraw 529 money first!

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A good place to start:

See the best 529 plans, personalized for you