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In this installment of our Ask the Editor series, Joy Taylor, the Editor of The Kiplinger Tax Letter, addresses several inquiries related to 529 college savings plans. Below, she offers insights on various topics submitted by readers.
Q1: Handling Unused Funds
We have financed a 529 college savings plan for our son, and while we’ve utilized funds for his education, there are still remaining funds in the account. What options are available to avoid taxes on this balance?
If there are unused funds in a 529 plan after the beneficiary has either completed their education or decided not to attend college, several tax-free alternatives exist for utilizing these funds:
- Retain the funds in the account for potential future education costs, such as graduate school.
- Apply the 529 funds toward qualified apprenticeship programs for the beneficiary.
- Transfer any leftover funds to another family member’s 529 plan for their educational needs.
- Use up to $10,000 for paying off the beneficiary’s student loan debt, keeping in mind that this limit applies over the beneficiary’s lifetime rather than annually. Any funds beyond this cap will be subject to taxes and a 10% penalty.
- Roll over funds from a 529 plan to an ABLE account for beneficiaries with disabilities or their siblings who are also disabled.
- Some leftover funds can be transferred to a Roth IRA for the beneficiary through a direct trustee-to-trustee transfer, subject to specific conditions: the 529 account must have been open for 15 years with the same beneficiary, there is a lifetime limit of $35,000, contributions made in the last five years cannot be transferred, and annual distributions cannot exceed the IRS Roth IRA annual contribution limit (which is $7,000 in 2025). Additionally, contributing to any IRA in the same year will count against this limit.
For instance, if the beneficiary were to contribute $2,000 to a traditional IRA in 2025, only $5,000 from the 529 plan could be transferred to the Roth IRA that same year.
— Joy Taylor, Editor The Kiplinger Tax Letter
Q2: Using 529 Funds for Off-Campus Housing
My daughter, now a sophomore in college, plans to move into an apartment with friends next year. Can I use 529 funds for her rent, utilities, and food?
Withdrawals from 529 plans for qualified college expenses are generally tax-free. Eligible costs encompass tuition, supplies, and the cost of room and board for students attending at least half-time. It is permitted to use 529 funds for off-campus housing expenses, including rent, utilities, and food. However, the amount withdrawn must not exceed the room and board allowance set by the college, which can typically be found on the institution’s website.
— Joy Taylor, Editor The Kiplinger Tax Letter
Q3: Study Abroad and 529 Funds
Are 529 funds applicable for a college student studying abroad?
In many instances, yes. A 529 plan can be utilized for any college that is part of the U.S. federal student aid program. If a student enrolled in a U.S. college participates in a study abroad program offered through their institution, those expenses qualify for 529 funding, provided the college accepts the transfer credits. However, if the student decides to attend a non-U.S. college for their entire education, that foreign institution must also be recognized within the U.S. federal student aid framework. Surprisingly, numerous international colleges meet this requirement and can thus qualify under 529 regulations.
— Joy Taylor, Editor The Kiplinger Tax Letter
Q4: IRA Distributions and 529 Funding
As I am currently taking required minimum distributions (RMDs) from my traditional IRA, can I transfer a portion of that RMD tax-free to a 529 plan for my granddaughter?
Unfortunately, there is no effective tax strategy for using RMDs from an IRA to fund a 529 plan. If you desire to contribute RMD funds to a 529 account for your granddaughter, it would first be considered as taxable income to you, and then counted as a post-tax contribution to the plan.
— Joy Taylor, Editor The Kiplinger Tax Letter
Q5: Tax Implications of University Refunds
I utilized 529 funds for my son’s tuition and board, but he later received a check from the college refunding part of the amount paid. Is this amount taxable to me?
Under current tax laws, there is relief available for this situation, provided timely action is taken. Legislation passed in 2015 allows for tax and penalty waivers in cases where a refund is issued from a college after a distribution is made from a 529 account. To benefit from this provision, the refunded amount should be redeposited into the same 529 account within 60 days of receipt. This recontribution will be treated as a return of principal.
— Joy Taylor, Editor The Kiplinger Tax Letter
Readers have submitted numerous questions related to various financial topics, including annuities and health savings accounts. More answers to these inquiries will be included in future installments of Ask the Editor, and we encourage readers to continue sending in their questions.
Subscribers to The Kiplinger Tax Letter and The Kiplinger Letter have the opportunity to ask Joy questions about tax-related concerns. Full details on how to submit inquiries can be found in The Kiplinger Tax Letter and The Kiplinger Letter.
Please note that not all submitted questions will be published, and some may be shortened or combined for clarity. The responses provided by our editorial team aim to offer general information. However, they do not replace the need for independent financial, legal, or tax advice. For specific inquiries, consulting a qualified professional is recommended.
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