While most Americans have made little if any progress in their college savings goals, others have a more enviable dilemma of potentially running past the finish line. Still others have found that their children aren’t choosing the collegiate path. No need to worry. You have many great options when managing an overfunded 529 college savings plan.

Withdraw the Funds

If you have more money than college expenses, you can simply withdraw the funds. The down side is that your earnings are included in taxable income and incur a 10% penalty. If you invested ten thousand dollars which grew to fourteen thousand dollars, you pay the tax and 10% penalty on the four thousand of growth. But you also have to remember that you had tax deferred growth for every year these funds were invested in the 529.  For most savers, tax deferral is worth more than 10% penalty on earnings.

If you don’t need these funds because your child or grandchild qualified for a needs-based or academic scholarship, enters a military academy or becomes disabled, you have the advantage of avoiding the 10% penalty but not the tax on the earnings portion.

Transfer to Another Family Member

Many of our clients have transferred funds from one child to another as needed. Another client used unspent funds originally designated for his grandchildren to benefit his great-grandchildren. They think of these funds as a multi-generational educational trust fund. The IRS allows you to change 529 beneficiaries among a large group of qualified family members including siblings, step-siblings, aunts, uncles or the spouses of each.

You can ignore gift tax consequences if a beneficiary is a sibling, cousin or assigned to the same generation as the current beneficiary. If you change generations, the 529 rules allow you to combine 5 years of annual gift exclusions at one time for a super-gift. With a $14,000 gift tax exclusion in 2015 and 2016, you can transfer up to $70,000 to a new beneficiary from another generation without incurring a gift tax.

Use For Yourself

You also might also decide to use some of the funds to pursue college art history classes or my own personal 529 backup plan, a Marine Biology degree from the University of the Virgin Islands located on St. Thomas. Oxford and Cambridge are also happy to help you put those 529 funds to work.

With so many options for putting funds to good use, don’t let the possibility of an overfunded 529 plan keep you from saving for the future.

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