What to do with a significant 529 surplus

General Discussions Forum
1

I was generously left with approximately $300,000 in a 529 account from my grandmother to fund my education. I am currently two years into university, paying $13,000 per year in tuition and $11,000 for housing. I also receive a $10,000 per semester scholarship, which I have been withdrawing at the start of each semester and investing.

I am realizing that I will have a large surplus—likely around $150,000—remaining in the 529 after completing my degree. I do not plan to attend graduate school. I would like to use these funds toward purchasing a house after graduation, but I understand that withdrawing the funds for non-educational purposes would result in taxes and penalties since the contributions were made in 2005.

What is the most productive way to utilize this surplus?

2

Key Considerations:

  • If your grandmother is still alive, she owns the account and will need to approve any changes.
  • If she has passed, you are likely the owner, but confirm this first.

Options:

  1. Roth IRA Rollover: You can roll over up to $35,000 from the 529 to a Roth IRA, following annual contribution limits ($7,000 per year for those under 50).
  2. Keep the Funds for Future Education: Even if you don’t plan on grad school now, circumstances may change.
  3. Transfer to Future Children: You can keep the funds in the 529 and later change the beneficiary to your future children (or other eligible relatives).
  4. Cash Out for Non-Education Expenses: If you withdraw funds for a home purchase, you’ll pay taxes on the earnings plus a 10% penalty.
3

@Valentina
Regarding the 529-to-Roth IRA rollover, the amount transferred counts toward the annual contribution limit, but it is not subject to income limits that typically apply to Roth contributions.

4

@Valentina
Consider waiting before making major decisions.

  • At 24, you may think you won’t pursue graduate school, but after gaining work experience, you could change your mind.
  • Holding onto the 529 for a few years gives you more flexibility.
  • The tax burden on early withdrawal is significant, so weigh your options carefully.
5

Alternative Uses for the 529 Funds:

  • Change the beneficiary to a sibling or future child.
  • Roll over up to $35,000 into a Roth IRA (spread over several years, following annual contribution limits).
6

@Wren
Just to clarify, the $35,000 Roth IRA rollover cap applies over time, meaning you must follow the $7,000 per year limit until you reach $35,000 total.

7

Best Ways to Use the Surplus:

  1. Rollover to Roth IRA – Up to $35,000, following contribution limits.
  2. Transfer to a Future Child’s 529 Plan – The account can continue to grow tax-free.
  3. Hold for Future Graduate School or Education Needs.
8

@Trey
Do not cash out for a house. The taxes and penalties will reduce your total significantly. Instead:

  1. Use the Roth IRA rollover to jumpstart retirement savings.
  2. Keep the remaining funds for future educational purposes.
  3. Consider using it for a family member’s education.
9

You can roll up to $35,000 into a Roth IRA, but only in $7,000 annual increments (assuming you have taxable income).

10

If you withdraw the funds for a house, expect:

  • Income tax on the earnings
  • A 10% penalty on the earnings

Consider rolling over to a Roth IRA first before taking any withdrawals.

11

Do you plan to have kids? If so, keeping the funds in the 529 means their education is already paid for. Let it grow tax-free.

12

Keep it for future education. Whether for yourself, a spouse, or future children, this account can continue growing tax-free.

13

The safest option is to:

  1. Max out the Roth IRA rollover ($35,000 over several years).
  2. Hold the remainder for potential future education.
  3. Transfer to a future child if you have one.
14

If you’re certain you won’t need the funds for education:

  1. Rollover $35,000 to a Roth IRA.
  2. Leave the rest in the 529 until you are sure about your long-term plans.
  3. If necessary, withdraw funds when tax rates are favorable.
15

Roth IRA first. You’ll pay taxes once and never again. The growth will be tax-free for life.

16

Speak to your grandmother first if she is still alive. She may prefer that the funds remain for future generations rather than be withdrawn for non-educational expenses.

17

Consider long-term benefits. Even if you don’t plan on grad school now, plans change. This money could be a major asset later.

18

Some people have transferred their 529 to a brokerage account, but this comes with tax implications.

19

529 funds can only be used for educational expenses. If you try to use them for a house, you’ll incur taxes and penalties.

20

Elsa said:
529 funds can only be used for educational expenses. If you try to use them for a house, you’ll incur taxes and penalties.

This is misleading. Housing may qualify for educational purposes if it meets certain conditions, but purchasing a home is not a qualified expense.