Any (legal) “loophole” for unused 529 funds?

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Saaybogle
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Any (legal) “loophole” for unused 529 funds?

Post by Saaybogle »

I know of the oft-cited uses for 529 excess funds like changing beneficiary to a sibling/yourself or saving for a grandkid, but is there any penalty-free way to get 529 funds out of the account if I just overfunded? I’m willing to wait a long time if necessary. Thanks.
regularguy455
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Re: Any (legal) “loophole” for unused 529 funds?

Post by regularguy455 »

Go back to school?
Normchad
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Normchad »

Well, here is what I did. It’s not perfect.

Have the kid take out the money while they are in a zero income year. They will owe taxes and a 10% penalty on the growth of it. So that should be fairly low. Might spread it out over a few years.

Now that doesn’t really help you. I imagine if the kid gave the money back to you, that would be uncouth.

If you’re really prepared to wait a very long time,I’m sure at some point in the future some sort of tax or regulatory change will occur that will help you out.
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anon_investor
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Re: Any (legal) “loophole” for unused 529 funds?

Post by anon_investor »

If the beneficiary gets a scholarship, you can take out the scholarship amount and avoid the 10% penalty, but you still have to pay tax on the growth.
Wannaretireearly
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Wannaretireearly »

Hmm. Makes me think about using 529 for private high school to ensure these $ are used. Anyone started to do this? Prob deserves a seperate thread
Buy Low, Sell High
Normchad
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Normchad »

anon_investor wrote: Sun Sep 20, 2020 4:57 pm If the beneficiary gets a scholarship, you can take out the scholarship amount and avoid the 10% penalty, but you still have to pay tax on the growth.
+1. Absolutely correct, that is how I ended up in the "overfunded" camp. Note, I think you are required to take the *annual scholarship amount* each year, don't try to save it all up for the end (Like I did). But if this is the situation you are in, do a lot more research on it then just listening to me....
momvesting
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Re: Any (legal) “loophole” for unused 529 funds?

Post by momvesting »

Wannaretireearly wrote: Sun Sep 20, 2020 5:33 pm Hmm. Makes me think about using 529 for private high school to ensure these $ are used. Anyone started to do this? Prob deserves a seperate thread
I did this to cycle some money through, get the tax break, then invest in in a CD ladder I have going to pay the $4k/yr and $10k in year 5 (since college hits 5 calendar years) to get the AOTC and LLC tax breaks. My local credit union also has this crazy CD product that you can continue to add to, so I have CDs ranging from 2.96-3.45% that I was (and still am) investing in that expire in 2021-2023. Actually now that rates are so low elsewhere, I have gone over the amounts I need for the tax credit but right now the CDs are outperforming the 529 and do not necessarily need to be used for college.

As far as extra leftover in the 529, I was always curious if a crazy little submarket would develop, like if I had overfunded, could I "sell" the remainder to my brother for his younger kids that would get me a better deal than tax on earnings plus 10% penalty but for him is less than the dollar amount I pay towards my nephew's education??
Xrayman69
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Xrayman69 »

Wannaretireearly wrote: Sun Sep 20, 2020 5:33 pm Hmm. Makes me think about using 529 for private high school to ensure these $ are used. Anyone started to do this? Prob deserves a seperate thread
Yep. 10K is max for private school annually. 10K our and immediately place 10K back in next day so as to change the basis without affecting total amount.
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Watty
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Watty »

I have not done it but my understanding is that 529 money can be used for non-degree continuing education programs and it can also be used when studying overseas in some situations.

I took a six week photography class a few years ago that I am sure that I could have used 529 money for if I had any in a 529 account. The reason I am pretty sure of this was that for a small extra fee it was possible to get college credit for the class.

There are apparently a lot of restrictions on things like transportation, food, and lodging if you are not enrolled in a full time degree program but I would think that it would be plausible to do something like enroll in a cooking school then go study in cooking in France with 529 money.
Bobby206
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Bobby206 »

Hold it for future grandkids!?
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Nate79
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Re: Any (legal) “loophole” for unused 529 funds?

Post by Nate79 »

Have another kid. :)
SchruteB&B
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Re: Any (legal) “loophole” for unused 529 funds?

Post by SchruteB&B »

Watty wrote: Sun Sep 20, 2020 6:53 pm I have not done it but my understanding is that 529 money can be used for non-degree continuing education programs and it can also be used when studying overseas in some situations.

I took a six week photography class a few years ago that I am sure that I could have used 529 money for if I had any in a 529 account. The reason I am pretty sure of this was that for a small extra fee it was possible to get college credit for the class.

There are apparently a lot of restrictions on things like transportation, food, and lodging if you are not enrolled in a full time degree program but I would think that it would be plausible to do something like enroll in a cooking school then go study in cooking in France with 529 money.
There are not that many restrictions on using 529 for room and board if you are not a full time student. As long as you are a half time student (which at many community colleges can be achieved by taking two classes) you can use your 529 to pay for the FULL amount of what that college says its cost of attendance room and board figure is. Transportation is not a qualified education expense.
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anon_investor
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Re: Any (legal) “loophole” for unused 529 funds?

Post by anon_investor »

Nate79 wrote: Sun Sep 20, 2020 6:58 pm Have another kid. :)
Or tell your kids to have kids 😈
gclancer
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Re: Any (legal) “loophole” for unused 529 funds?

Post by gclancer »

Bobby206 wrote: Sun Sep 20, 2020 6:56 pm Hold it for future grandkids!?
+1
JBTX
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Re: Any (legal) “loophole” for unused 529 funds?

Post by JBTX »

If you or kids have special needs child you can move it to 529 ABLE ($15K per year max I think)

I think there is an exception if child goes to military.

If nothing can immediately be worked out, I would probably use it for my fixed income allocation, to limit growth (and tax/penalty).

You could use it as a substitute / supplement for your emergency fund, and take some of your current EF and put it in equities (money is fungible concept)

Just hold on to it, in case down the road you are at a lower tax rate, or if another potential beneficiary becomes available (grand kids)
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