According to Bankrate, there are four ways to handle leftover 529 money. They are:
1. You can replace the current beneficiary with another member of the beneficiary's family.
2. Your second option is to withdraw the leftover funds as a nonqualified distribution for your own noneducational use. However, you will owe ordinary federal tax along with an additional 10 percent penalty tax on the earnings portion of the distribution. You'll probably owe state income tax as well.
3. You can direct your 529 plan to make the withdrawal payable to the beneficiary (student).
4. Your final option is to do nothing. No one is forcing you to take action with respect to your 529 account just because your grandchild has graduated from college. You can simply keep the account going, taking further advantage of tax-deferred growth, and choose any of the first three options at any time in the future.
I could only be so lucky to have this problem. We're saving a good amount of money in our 529s (and Coverdells to boot), but with the way college costs are growing and the fact that we'll get zero need-based support, I think we'll need every bit of what we'll have saved and more! Then again, maybe one or both of our kids will get some great aid offer based on ability. Our babysitter just graduated this year and scored so high on her ACT that she got a full-ride scholarship to a local, private college. Not bad at all.
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