Personal Finance
How to make the most of leftover 529 college savings account money
Stephen Swintek | DigitalVision | Getty Images
As families try to offset the increasing cost of college education, many have turned to 529 college savings plans as a strategy.
These accounts let families set aside money toward college expenses while taking advantage of tax breaks and compound interest, according to certified financial planner Preston D. Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin. He is also a member of the CNBC Financial Advisor Council.
“If you start [investing] at the child’s birth, then you have 18 years to make money on top of money. And hopefully, that’s enough to outpace inflation of the price of college,” Cherry told CNBC.
Families have invested $441 billion in such accounts as of the end of 2023, according to Morningstar, a 16% increase from 2022. When it comes to paying for college, 35% of families used 529 funds in 2024, according to Sallie Mae. For the average family, that money covered 9% of the cost of attendance.
But what happens if you have leftover 529 funds?
“A student may get some scholarships or need-based financial aid. Or, sometimes, grandparents or other family members contribute to college expenses,” Cherry said.
Education choices can also result in a surplus. Figures show fewer students are earning bachelor’s degrees, while more are earning certificates due to growth of vocational programs.
Your unused money does not have to stay locked up in the 529 college savings account, Cherry said. Here are four ways to make the most of it:
1. Roll funds into a Roth IRA
Thanks to Secure Act 2.0, savers now have the ability to roll money from a 529 plan to a Roth individual retirement account, free of penalties or income tax. The measure, which took effect this year, gives Americans more flexibility with their 529 accounts.
“We, meaning the parents, saved and invested for your college education,” Cherry said. “We have excess funds that we didn’t use for you, but we still want to benefit your life. So we’re going to roll it over from one compound tax-deferred vehicle, a 529, to another.
“One pays for your college, the other is an investment into your future retirement,” he added.
This option has limitations, however.
To qualify for a transfer to a Roth IRA, the 529 account must have been open for 15 years. Plus, there is a lifetime cap on 529-to-Roth rollovers of $35,000.
Depending on how much money you want to transfer, it may be a multiyear project. The conversion counts toward your annual IRA contribution limit. For 2024, that is $7,000 for investors under age 50.
2. Change the beneficiary
If you feel certain the original beneficiary of the 529 plans will not need the leftover funds, say, for grad school, it is possible to change the account beneficiary to another “qualified family member.” That might include a sibling or step-sibling or parent, among other relatives, according to the IRS.
Changing a 529’s beneficiary does not trigger withdrawal fees or any tax penalty.
3. Pay off student loans
Another way to use leftover 529 funds is to pay off student loans, Cherry said. Under the Secure Act of 2019, savers can use funds for this purpose: up to $10,000 per year for each plan beneficiary, as well as for each of the beneficiary’s siblings.
4. Withdraw the money outright
As a last resort, Cherry said, families could withdraw 529 assets outright.
Your contributions can be withdrawn tax- and penalty-free, while any earnings not used for qualified expenses may be subject to income tax and a 10% penalty. An exception: If your child receives scholarships, you can withdraw up to the amount of that scholarship for nonqualified expenses without penalty.
This allows families to have immediate access to the money, rather than redirecting it to another account or putting it toward a qualified education expense.
“They could use the monies for themselves, to fund their current lifestyle or transfer that money into another saving and investment account for the future,” Cherry said.
Israel Sebastian | Moment | Getty Images
The fourth-quarter estimated tax deadline for 2024 is Jan. 15, and missing a payment could trigger “unexpected penalties and fees” when filing your return, according to the IRS.
Typically, estimated taxes apply to income without withholdings, such as earnings from freelance work, a small business or investments. But you could still owe taxes for full-time or retirement income if you didn’t withhold enough.
You could also owe fourth-quarter taxes for year-end bonuses, stock dividends, capital gains from mutual fund payouts or profits from crypto sales and more, the IRS said.
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Federal income taxes are “pay as you go,” meaning the IRS expects payments throughout the year as you make income, said certified public accountant Brian Long, senior tax advisor at Wealth Enhancement in Minneapolis.
If you miss the Jan. 15 deadline, you may incur an interest-based penalty based on the current interest rate and how much you should have paid. That penalty compounds daily.
Tax withholdings, estimated payments or a combination of the two, can “help avoid a surprise tax bill at tax time,” according to the IRS.
What to know about the ‘safe harbor’ rules
One way to avoid penalties is by following the “safe harbor” rule, which means “you’re meeting that [IRS] pay-as-you-go requirement,” according to Long.
To satisfy the rule, you must pay at least 90% of your 2024 tax liability or 100% of your 2023 taxes, whichever is smaller.
The threshold increases to 110% if your 2023 adjusted gross income was $150,000 or higher, which you can find on line 11 of Form 1040 from your 2023 tax return.
However, you could still owe taxes for 2024 if you make more than expected and don’t adjust your tax payments.
“The good thing about this last quarterly payment is that most individuals should have their year-end numbers finalized,” said Sheneya Wilson, a CPA and founder of Fola Financial in New York.
How to make quarterly estimated tax payments
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Nearly 3 million individuals are poised to see their Social Security benefits increase, thanks to new changes signed into law by President Joe Biden this week. But with the higher checks could come additional tax burdens.
The Social Security Fairness Act — which passed by a bipartisan majority in both the House and Senate — ends reductions of Social Security benefits for certain individuals who also receive pension income from work in the public sector as firefighters, police officers, teachers and local, state and federal employees.
Those beneficiaries are set to see an increase to their monthly benefit checks. Because the legislation applies to benefits paid throughout 2024, they will also receive lump-sum payments to make up for that time.
The details of how those increases will be implemented are now being determined, according to the Social Security Administration.
In total, the benefit increases will cost $196 billion over a decade, according to the Congressional Budget Office. The additional outlay will move Social Security’s trust fund depletion dates six months closer. The program’s combined trust funds may pay full benefits until 2035, at which point just 83% of scheduled benefits may be payable, the program’s trustees projected last year.
How Social Security benefits may change
About 2.1 million beneficiaries — those who were affected by the Windfall Elimination Provision, or WEP — may see $360 more in monthly benefits on average, according to CBO estimates as of December 2025. The WEP, which has now been eliminated, reduced Social Security benefits for workers who also had pension or disability benefits from jobs where they did not pay Social Security payroll taxes.
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Additionally, about 380,000 spouses would see average benefit increases of $700 and 390,000 surviving spouses would see an average of $1,190 more, according to CBO’s estimates for December 2025.
Those beneficiaries were affected by the now-defunct Government Pension Offset, or GPO, which reduced Social Security benefits for spouses, widows and widowers who also receive their own pensions from public sector work.
The elimination of the provisions in many ways simplifies retirement income planning for affected beneficiaries, financial advisors say.
“For the people who are affected by this, you’re looking at a pretty significant increase, in many cases, of what their retirement income is going to be,” said Michael Daley, director of marketing at HealthView Services. “It’s good news for them.”
For financial planners and their clients, the challenge now is gauging how much of a benefit increase to expect and when to expect it, said Joe Elsasser, founder and president of Covisum, a Social Security claiming software company.
The extra income may also present some complications when it comes to affected beneficiaries’ taxes and Medicare premiums, experts say.
Beneficiaries could see higher taxes on benefits
Social Security beneficiaries may have their benefits taxed if their income falls over certain thresholds, experts say.
The additional money may also push some affected beneficiaries into higher tax brackets, according to HealthView Services.
Notably, President-elect Donald Trump has said he wants to nix taxes on Social Security benefit income, though it remains to be seen whether that change will be put into effect. However, per current rules, up to 85% of Social Security benefit income may be taxed.
The income thresholds upon which those levies are based are not adjusted annually for inflation. Consequently, more beneficiaries are subject to those taxes on benefits over time, including middle class households, Daley said.
Those levies are determined based on a formula called combined income — the sum of adjusted gross income, nontaxable interest and half of Social Security benefits.
Individuals pay taxes on up to 50% of their benefits if their combined income is between $25,000 and $34,000, or for married couples with between $32,000 and $44,000.
Individuals may pay taxes on up to 85% of their benefits if their combined income is more than $34,000; or for married couples with more than $44,000.
“Because Social Security benefits are taxed differently than everything else, people are going to really want to pay attention to their other sources of income,” Elsasser said of the anticipated benefit increases and lump sum payments.
For example, if a retiree has both a taxable account and traditional individual retirement account, they may want to prioritize withdrawals from the taxable account because only the gains would be taxed rather than the entire withdrawal, Elsasser explained. In the event the lump-sum payment of retroactive Social Security benefits is not distributed, they may take an IRA withdrawal later in the year.
Beneficiaries may see higher Medicare costs
Additional benefit income for individuals affected by the Social Security Fairness Act may also result in higher income-based surcharges for Medicare Parts B and D.
Medicare beneficiaries with higher incomes must pay what’s known as income-related monthly adjustment amounts, or IRMAAs, for their Part B and Part D premiums.
“If you get a lump sum but you’re not paying attention to your other incomes, you could unwittingly be pushed into higher Medicare premiums two years down the road,” Elsasser said.
That will mostly be a concern for people who are on the cusp of the income thresholds, he said.
In 2025, Medicare Part B beneficiaries who file individual tax returns with $106,000 or less in modified adjusted gross income — or married couples who file jointly with $212,000 or less — pay a standard monthly premium of $185 per month.
Beneficiaries above those income thresholds pay higher Part B premium payments, based on an IRMAA. This year’s rates are based on income on tax returns filed in 2023.
In 2025, Part D beneficiaries over the $106,000 threshold for individuals and $212,000 for married couples are also subject to income-related monthly adjustment amounts in addition to their plan premiums. Those monthly premiums are also based on yearly income reported on tax filings for 2023. In 2025, the national base Part D premium is $36.78.
Steps to take now
Beneficiaries who are affected by the Social Security Fairness Act should consider consulting with a financial advisor to assess the implications of the change on their personal financial circumstances, said Ron Mastrogiovanni, chairman and CEO of HealthView Services.
Additionally, it would help to sit down with a certified public accountant when filing their taxes to plan for 2025, he said.
The Social Security Administration also plans to provide more guidance on the new law as more details become available.
For now, the agency recommends verifying that direct deposit and mailing address it has on file is still accurate. To update that information, the Social Security recommends changing it online or calling or visiting a Social Security office in person.
Some individuals may now become eligible for Social Security benefits for the first time, now that the WEP and GPO provisions have been eliminated.
To file for benefits, the Social Security Administration recommends either filing online or scheduling an appointment with the agency.
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