Ask an Advisor with Caleb Boy: Am I Overfunded?
If you’re like many diligent parents or grandparents, you’ve been steadily contributing to a 529 college savings plan, maybe even since before your child was born. That kind of foresight and discipline is admirable. But now you’re wondering: What if we saved too much? Is our 529 overfunded?
Let’s talk about what that really means—and what your options are if you find yourself in this boat.
What Does “Overfunded” Actually Mean?
A 529 plan is considered “overfunded” when the account balance exceeds your beneficiary’s projected qualified education expenses. The issue isn’t that the money disappears—529 funds remain yours—but using the money outside qualified education expenses can come with taxes and a 10% penalty on earnings.
What You Can Do With an Overfunded 529
Thankfully, overfunding a 529 plan is far from a dead end. You have several smart strategies at your disposal:
1. Change the Beneficiary
You can change the beneficiary to another qualifying family member without penalty. That includes siblings, cousins, parents—even yourself. Thinking of grad school or a career pivot? This money could support your own educational journey.
2. Use It for Continuing Education or Grad School
Even if your child finishes their undergraduate degree with money to spare, they may pursue graduate school or a professional certification. 529 funds can help cover those costs too.
3. K-12 Tuition or Student Loan Repayment
Recent legislation allows up to $10,000 per year for K-12 tuition and a lifetime limit of $10,000 toward student loan repayment (per beneficiary). This can be a way to redirect leftover funds efficiently.
4. Roll It Into a Roth IRA
Thanks to the SECURE 2.0 Act, starting in 2024, you can roll unused 529 funds into a Roth IRA for the beneficiary—up to $35,000 over their lifetime. This is a powerful way to kick-start their retirement savings, tax- and penalty-free (if certain conditions are met).
How to Know If You’re Actually Overfunded
Before jumping to conclusions, it’s important to do the math. Here’s what to consider:
- Current and projected 529 balance
- Expected cost of attendance (tuition, fees, room and board, books)
- Scholarships or financial aid awarded
- Number of years of education expected
- Potential graduate school or career training plans
An overfunded 529 isn’t a mistake—it’s an opportunity for strategic planning. If you’re wondering how this may apply to your financial house, give us call today at (615) 457-3481 or email me at caleb@wealthstrategiespartners.com so I can help!
529 plans come with fees and expenses, and there is a risk they may lose money or underperform. Most states offer their own 529 programs, which may provide benefits exclusively for their residents. Please consider whether the state plan offers any tax or other benefits. Tax implications can vary significantly from state to state. State tax treatment of K–12 withdrawals is determined by the state(s) where the taxpayer files state income tax. Please consult with a tax advisor for further guidance.