So you did a great job of saving for college for your child and they are finally graduating—yay! In fact, you did such a good job that maybe you saved too much. What can you do about it? Here are some options for you to consider:
- Change the Account Beneficiary: You can change the account's beneficiary to someone else. Your options include other children, nieces, nephews, a grandchild or even you or your spouse, should you choose to take some classes at an eligible institution.
- Pursuing an Advanced Degree: These funds are also available if your child decides to continue with their education, which may include a master's degree or perhaps law school or medical school.
- Penalty-Free Withdrawals: Did your child choose to attend a U.S. service academy? Or, perhaps they received some unanticipated merit or athletic scholarships. If this is the case, you are allowed to withdraw dollars, in the year the scholarship was granted (or during his / her attendance at a service academy) up to the amount of the scholarship. The beauty of this option is you can withdraw the funds without paying the 10% federal penalty. Unfortunately, you will still need to pay the taxes on the earnings portion of the withdrawal, but you do avoid the penalty.
- Non-Qualified Withdrawals: This is the last option, should one of the above options not prove to work for your circumstances. Funds withdrawn from a 529 plan account that are not specifically used for qualified education expenses are subject to both income taxes and tax penalties. Federal tax and penalty do not apply to the original principal contributions; however, they do apply to the earnings on those contributions.
If you think you will find yourself in the circumstances outlined above, talk to your SWA advisor immediately regarding which may be the best option(s) for you to consider.