Leftover 529 Money & 529 Plan Hacks
529 Plan Basics
A 529 plan is a tax-advantaged investment account designed to help families save for education. It allows your money to grow tax-free, and withdrawals are also tax-free when used for qualified education expenses, such as college, graduate school, or apprenticeship programs. These plans are sponsored by states, state agencies, or educational institutions and follow rules set by Section 529 of the tax code.
Account Owner
The account owner is the person who starts a 529 plan. Anyone over 18 can open one to save for college or other qualified education costs, like apprenticeships or K-12 tuition. Usually, parents open 529 plans for their kids, grandparents for their grandkids, and adults can open one for themselves.
Account Beneficiary
A designated beneficiary is usually the student who will ultimately use the plan's benefits for their educational expenses. Typically, the beneficiary has the flexibility to attend any qualified educational institution, not limited to just schools within the state that offers the 529 plan. This allows for greater freedom in choosing where to pursue higher education.
Annual Contributions
In 2025, you are allowed to give up to $19,000 per individual ($38,000 if you are married and filing jointly) without it impacting your lifetime gift tax exemption. Additionally, the special 5-year election provides an opportunity to contribute a larger amount upfront into a child's college savings account, allowing the investment to grow tax-free over time. For single filers, this means you can gift as much as $95,000 all at once, while married couples can contribute up to $190,000 per child under this provision.
Common Qualified Expenses Covered
Tuition and fees, books and supplies, computers, software and internet access, room and board, tutoring, standardized test fees, credentialing expenses, apprenticeship programs, and student loans with a lifetime limit of $10,000. Beginning January 1, 2026 the total limit for K-12 expenses will rise to $20,000 per year (from $10,000).
Common Expenses Not Covered
Transportation and travel costs, health insurance premiums, college application fees, smart phones, room and board expenses that exceed the standard costs of school housing, and fees associated with extracurricular activities.
Taxes and Penalties
The earnings portion of a non-qualified 529 distribution—that is, a 529 distribution used to pay for expenses that do not meet the criteria—will be subject to a 10% federal withdrawal penalty. When 529 plan distributions are made, they are allocated between the earnings and the contribution (basis) portions. It’s important to note that the contribution portion will never be subject to taxation or penalties, as these contributions were made with after-tax dollars.
State Tax Deductions
May 2025 Savingforcollege.com
Over 30 states offer a tax incentive for contributing to the 529 plan in an account owner’s state of residence.
Account owners in the nine parity states can deduct their 529 plan contributions on state taxes, no matter if the plan is in their state or another.
In most states, you must make contributions by December 31 of the tax year to get a state income tax benefit. For 2025, that means the deadline is December 31, 2025. But in eight states—Georgia, Indiana, Iowa, Kansas, Mississippi, Oklahoma, South Carolina, and Wisconsin—the deadline is in April.
Ohio 529 Plan State Tax Deduction Hacks
In some states, such as Ohio, you can contribute to a 529 plan and then withdraw those exact same dollars within the same week, allowing you to still qualify for the state tax deduction. This strategy can be useful for maximizing tax benefits while maintaining flexibility in your financial planning. However, Montana and Wisconsin block this state tax deduction loophole by imposing time limits, and Michigan and Minnesota base state income tax benefits on annual contributions net of distributions.
In Ohio, you can deduct up to $4,000 of contributions per beneficiary each year on your state taxes. For families with two children, this means you can claim a total deduction of $8,000 annually. If you are married and open separate accounts for both yourself and your spouse, you can effectively double the deduction, increasing the total to $16,000 per year. Additionally, any portion of the deduction that you do not use in a given year can be carried forward indefinitely, allowing you to maximize your tax benefits over time.
Options for Leftover Funds in 529 Plan
5 Options to Avoid Taxes and Penalty
Change Beneficiaries (family members only)
Transfer Funds to Another 529 (family members only)
Payoff Student Loan Debt (beneficiary or siblings of beneficiary)
Utilize for Graduate School, Trade School or Certifications
Roth IRA Rollover (beneficiary only)
If the options above don't work for you, you could take the money out, pay the 10% penalty and taxes, especially if your child is in a lower tax bracket. Or, you can let the money grow tax-deferred until retirement and withdraw it then, possibly in a lower tax bracket.
Also keep in mind that if you receive a scholarship, you are allowed to withdraw an amount equal to the scholarship from your 529 plan without incurring any penalties. However, it is important to note that although the withdrawal is penalty-free, the earnings portion of that withdrawal will still be subject to income taxes.
Roth IRA Rollover Mechanics
Starting January 2024, the Secure 2.0 Act of 2022 allows you to move money from your 529 account to a Roth IRA for the Designated Beneficiary of that 529 account if certain conditions are met:
The 529 account needs to have been in existence for the current beneficiary for 15 years.
The amount transferred cannot contain any contributions or earnings on contributions made in the last five years.
The Roth IRA must be in the beneficiary’s name, not the 529 account owner's (usually the child, not the parent).
You can transfer up to $35,000 per beneficiary in a lifetime.
The transfer counts as a Roth IRA contribution, so the yearly limit of $7,000 applies (meaning it takes 5 years to fully use $35,000).
The beneficiary must have earned income at least equal to the amount contributed each year.
Transfers must be done directly between trustees, not by withdrawing and redepositing manually.
Leftover 529 Funds Example
John and Mary’s child, Sara, completed a four-year degree at Ohio State University. Her 529 plan still has $50,000 left. Sara just started a job with a $40,000 yearly salary. The 529 account was opened at Sara’s birth, with no contributions in the past five years. The original amount invested (cost basis) of the $50,000 is $20,000, or 40%.
Sara chooses to open a Roth IRA to save for retirement and get tax benefits. She can incrementally move $7,000 from her 529 plan to the Roth IRA over five years ($35,000 total) to avoid taxes and penalties. She will take out the remaining $15,000 from the 529 plan, with $900 in penalties and $1,080 in taxes, resulting in net proceeds of $13,020.
Should you have more than one 529 plan if you have multiple children?
Although you can use one 529 account for all of your children and either change the beneficiary as each child finishes school or transfer the money to a new 529 plan when the next child starts college, it is not recommended based on the following items:
With Secure Act 2.0 allowing Roth IRA rollovers, if you want each child to be able to rollover leftover funds it’s important to start the 15-year clock early by creating a separate 529 plan for each child. The 529 account needs to have been in existence for the current beneficiary for 15 years.
Having separate 529 plans for each child can give extra state tax benefits and lets you tailor investment goals based on each child’s timeline. This way, each account matches the child’s needs, risk level, and goals for a more effective college savings plan.
If the account balances are relatively small, and the fees charged per individual account are significant, while the investment objectives across these accounts remain similar, then it may be worth considering consolidating those into a single 529 plan account. This approach can potentially reduce costs and simplify management.
Ville Wealth Management is a Registered Investment Adviser in the state of Ohio. Advisory services are only offered to clients or prospective clients where Ville Wealth Management and its representatives are properly registered or exempt from registration. “Likes” should not be considered a positive reflection of the investment advisory services offered by Ville Wealth Management. Brian Jaros is an investment adviser representative of Ville Wealth Management. The firm is a registered investment adviser and only conducts business in jurisdictions where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability. The information presented on this post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Comments should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell the investments mentioned. A professional adviser should be consulted before implementing any of the strategies discussed. Investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's portfolio. All investment strategies can result in profit or loss.
