Q. Is it a smart move to use a younger sibling’s 529 College Savings Account to pay for an older sibling’s college tuition or should we fund it through other savings?
And what do we do with the extra 529 money, if the younger sibling does not want to attend college? (If we tap the account to pay for the older sibling’s tuition, we will probably have about $150,000 left.) — Pop in Pennsylvania
A. The short answer is yes.
Given that the younger child may not plan to attend college or another eligible institution, it makes sense to utilize that child’s 529 funds for the older kid, says Clay Ernst, executive director of financial planning at Edelman Financial Engines. The 529 account owner – presumably one of the parents – can simply change the beneficiary.
“Just keep in mind that the IRS has a relatively broad definition of eligible educational institutions that go beyond traditional four-year colleges and include many trade and vocational programs,” Ernst says. “So, even if the younger child elects to pass on college, many other qualified programs could be a good fit.”
While you cannot directly withdraw from a beneficiary’s account for someone else’s educational needs, you can move a portion from one beneficiary’s 529 to the sibling, adds Kelli Smith, who is Edelman’s director of financial planning.
“This is called a rollover, and you will likely need to complete a form, so check with your 529 plan about its specific process,” Smith says. A rollover is a tax-free and penalty-free transfer.
New legislation – known as Secure Act 2.0 – adds an interesting option for unused 529 funds. If the 529 account has been open for more than 15 years, unused funds can be rolled over into a Roth IRA owned by the 529 beneficiary.
“The annual rollover amount cannot exceed the annual IRA contribution limits, and there is a $35,000 lifetime cap per beneficiary (among other limitations), but this may be an attractive option to consider,” Ernst says.
Alternatively, the 529 account owner could change the beneficiary to another family member who may need the funds – including themselves.
“Perhaps you or your spouse would like to return to school to pursue a hobby or career change,” says Edelman’s Brian Leslie, who is also a director of financial planning at the firm.
The account owner could also put the unused funds to work for retirement, subject to a 10% penalty on earnings in the account.
“Fortunately, these funds have no withdrawal deadlines, meaning they can stay in the account indefinitely,” Smith notes.
One other option? Save for future generations, Leslie says. Just keep the money in the account, and change the beneficiary to a grandchild later down the road.
