Education Planning Common Questions
What happens if my child finishes college and there is money left over in the 529 account?
If you withdraw the money that is left over in your 529 account and don't use it to pay for the beneficiary's qualified higher education expenses, you'll have to pay a federal penalty tax of 10 percent on the earnings portion of the withdrawal (a state penalty may apply as well). You may also have to pay federal, and in some cases state, income taxes on the earnings portion of the withdrawal.
However, if you have money left over in your account, withdrawing it and paying a penalty isn't your only option. All 529 plans allow the account owner to change the beneficiary without penalty (although depending on the plan, there may be a fee for this service). In addition, you may be able to receive a "rollover" distribution from your 529 plan and recontribute the proceeds within 60 days to the same or a different state's program with a new beneficiary. Keep in mind that in both instances the new beneficiary must be a qualifying family member, or taxes and a penalty will be due.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.