Empty Nesters: What Can You Do With a College Savings Plan if Your Kids Are out of School?

So your kids have completed college and you still have money left in your 529 college savings plan. You can siphon the remaining cash and spend it on anything you please, but it will cost you -- both a 10 percent penalty and income taxes apply.

There are, however, ways to skip the penalty and stretch the funds further -- you'll just have to apply it to further education.

It's never too late to go back to college
Consider going back to college. Just because your kids may not be using the money or have already finished college doesn't mean that the money has to go to waste. Many parents are going back to school in response to the economic troubles of the last decade. After all, only the original beneficiary's family members can take advantage of the funds without tax penalties.

No penalty with tax-free academic rewards
While in school, if your kids receive free scholarship or fellowship awards, you will not have to pay the penalty as stipulated by the 529 plan. This is an exception written into the IRS tax code. Unfortunately, you will pay income tax for any earnings from your distribution, just not the 10 percent penalty. 

Some other exceptions include nontaxable distributions for education assistance from an employer or if the beneficiary receives veteran assistance or attends a U.S. military academy. If you can avoid the penalty fee based on these exceptions, you might consider rolling over this money into a retirement investment. Before you make a final decision, note that every state is different and the rules vary.

Change the designated beneficiary
If you feel that holding onto your account may be a better option, remember that your family can benefit from college savings even if your children are all finished with school. You may want to change the beneficiary to someone outside your immediate family. In most cases you can transfer the beneficiary to a first cousin, a brother or sister -- related by blood or marriage -- or an in-law. Make sure you check the bi-lines of your 529 plan and consult with a tax advisor to know for certain whom you may designate as the beneficiary.

Additionally, you can designate a future grandchild as a beneficiary. In this case, you would want to transfer the ownership of the account to your child so that your grandchild will be the beneficiary under their parent's account. You can do this penalty-free.

As with any other investment vehicle, always consult your CPA while you are planning your next move. Every decision you make will affect your taxes and planning each step is fundamental in getting the most out of your 529 plan.


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