529 Plans and What Happens When Funds are Not Used

We frequently hear the question, “What can I do with the money left in my 529 plan?”  And the short answer is that you will be taxed if you take the money out without using it to pay for qualified expenses PLUS you will pay a 10% penalty for doing so.

However, at Life Benefits, LLC, we are out of the box thinkers and so the long answer is, “You can avoid those taxes AND the 10% penalty if you merely understand and follow the law.

Justice Louis Brandeis once stated that using the long way home to help decongest Washington DC was a public service whereas taking the shorter way home via the toll bridge between DC and Alexandria, Virginia required a tax to be paid.  “Likewise,” Brandeis avowed, “taking the time to discover, understand and apply the law in a way which prevents you from having to pay taxes and penalties is a public service and should be rewarded.”

With Justice Brandeis’ approval you should always be looking for ways to pay less in taxes and to eliminate penalties on your savings and investments.  Your 529 savings accounts are no exception.

As the law legally allows the beneficiary of a 529 to be changed once a year, this means unused 529 funds can be directed to anybody within your family, including yourself.  Because of this regulation, the money you saved in a 529 plan for a spouse or child doesn’t have to be spent on that person.  Therefore, transferring the beneficiary of the 529 plan to yourself is the first step to avoiding unnecessary taxes and the 10% penalty.

Once this is accomplished you have the legal right to spend the 529 funds for qualified expenses that you yourself incur.  This means you can spend the money on your own education, and/or related expenses associated with your education such as tuition, fees, books, supplies or computer related expenses, as long as the credits you earn are from an accredited institution.

Obviously, if you spend these 529 plans on continuing education for yourself, the money you normally would have spent to cover these expenses can now be used for other purposes like building sustainable wealth where taxes and penalties don’t encroach upon your disciplined savings accumulation.

The most natural place to accomplish this would be in participating whole life insurance.  And because your money will grow tax free, you will be able to access the value in your policy for emergency or planned financing without losing the growth, and you will build a legacy that will pass tax free to the next generation all at the same time.

529 plans have been pushed by financial planners and advisors for years, but many end up getting hit with taxes and losing 10% of what they saved when their child or spouse doesn’t need or decided not to attend college.  This is a viable option to legally avoid the tax and the penalty, and in doing so you will be doing a public service and should be rewarded.

Dr. Tomas McFieDr. Tomas P. McFie

Most Americans depend on Social Security for retirement income. Even when people think they’re saving money, taxes, fees, investment losses and market volatility take most of their money away. Tom McFie is the founder of Life Benefits which helps people keep more of the money they make, so they can have financial peace of mind. His latest book, How to Build Sustainable Wealth, can be purchased here.