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Empty nesters: What you can do with a college savings plan if your kids are out of school

Nov. 4, 2013
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So your kids are done with college and you still have money left in your 529 college savings plan. You can siphon the remaining cash and spend it on anything you please, but it will cost you – both a 10 percent penalty and income taxes apply.

There are ways to skip the penalty and stretch the funds – you’ll just have to apply it to further education.

It’s never too late to go back to college

Consider going back to college. Economic problems have sent many parents back to school. And only the original beneficiary’s family members can take advantage of the money without tax penalties.

No penalty with academic rewards

You won’t have to pay a penalty if your kids receive scholarship or fellowship awards, though. That’s an exception written into the IRS tax code. Unfortunately, you will pay income tax for any earnings from your distribution, just not the 10 percent penalty. 

Some other exceptions: nontaxable distributions for education assistance from an employer, or if the beneficiary receives veteran assistance or attends a U.S. military academy. If you can avoid the penalty fee based on these exceptions, you might consider rolling over this money into retirement investments. Before you decide, note that the rules vary from state to state.

Change the designated beneficiary

If you prefer to hang onto your account, remember that your family can benefit from college savings even if your children are all done with school. You might want to change the beneficiary to someone outside your immediate family. In most cases you can designate a first cousin, a brother or sister – related by blood or marriage – or an in-law. Check your 529 plan or talk to a tax adviser to see who’s eligible.

You also can designate a future grandchild. In this case, you’d want to transfer the account to your child, so that your grandchild would be the beneficiary under his parent’s account. You can do this penalty-free.

As with other investment vehicles, it can be worthwhile talking with a CPA while planning your next move. These kind of decisions can affect your taxes, and you want to get the most out of your 529 plan.