Making the Most of an Overfunded 529 Plan

Since their expansion in 2001, 529 savings plans have become a cornerstone of college funding strategies. By the end of 2025, assets in 529 plans reached over $600 billion across 17.6 million accounts, with average balances climbing to $34,000—up from $13,000 in 2009. Notably, 36% of accounts now receive automatic contributions.¹ At the same time, nearly one-third of families incorporate 529 plans into a broader college savings approach.²

Families may hesitate to save more

Still, some families may be reluctant to make more significant contributions into a 529 plan. Concerns about overfunding are among the reasons cited by families. Here are some of the reasons why families may not fully take advantage of 529 plans:

Families may anticipate receiving financial aid. However, the reality is that most federal financial aid is comprised of loans, which generally need to be repaid. Additionally, the financial aid calculation process places more significance on the amount of household income instead of asset ownership such as a 529 plan.
The child may receive other scholarship money, attend a less costly school, not end up going to a traditional four-year college or not attend college at all.

Given the strong market performance over the past decade, some families who have diligently funded and invested in 529 accounts may find they have accumulated more funds than needed. These concerns are valid, but they often overlook the flexibility built into today’s 529 plans.

Considerations for overfunded 529 accounts

What families may not realize is there are options for 529 plans that have excess funds. Here are some ways to use 529 funds if the account has been overfunded.

1. Turn education savings into retirement savings (Roth IRA transfer)

One of the most significant recent enhancements to 529 plans is the ability to transfer unused funds into a Roth IRA. Up to $35,000 per beneficiary can be transferred into a Roth IRA over their lifetime. This can jump-start long-term, tax-free retirement savings while avoiding the taxes and penalties associated with non-qualified withdrawals.

Important rules:

The 529 account must be open for at least 15 years
Contributions made in the last five years (and earnings on them) are ineligible
Transfers are subject to annual Roth IRA contribution limits
The beneficiary must have earned income
Income eligibility limits do NOT apply for these Roth transfers³

This effectively turns an education account into a multi-decade wealth-building tool, especially powerful for young beneficiaries just starting their careers.

2. Build a multi-generational education legacy

529 plans also offer a unique opportunity to create an educational legacy across generations. Account owners can change the beneficiary at any time to another qualified family member-including children, grandchildren, siblings, parents, cousins and even in-laws—allowing the funds to continue growing on a tax-advantaged basis for future educational use. For example, a parent may fund a 529 plan for a child, and if those funds are not fully used, the beneficiary can be changed to a grandchild. This approach allows the account to keep compounding and potentially support education expenses for multiple generations.

Important consideration:

• Changing a beneficiary to a younger generation may trigger gift tax implications

• The IRS may treat it as a gift from the original beneficiary to the new one

• The annual gift tax exclusion ($19,000 in 2026) and five-year front-loading rules apply

• A gift tax return (IRS Form 709) may be required

There is currently no limit on how long a 529 plan can remain in place, making it a powerful vehicle for long-term family education planning and wealth transfer.

3. Change beneficiary to another family member

One of the key features of 529 plans is the flexibility around changing beneficiaries without any tax consequences. Since 529 accounts can be used for a variety of educational purposes (K-12 expenses, vocational training, apprenticeships, professional credentialing programs) there are a variety of options available to use the funds. For example, a parent owner of a 529 could change the beneficiary to themselves if pursuing some type of educational endeavor. To avoid potential penalties, the new beneficiary must be a family member. The good news is that for this purpose, the definition of “qualified family member” is broad and can include siblings, parents, children, in-laws, grandparents, stepparents and cousins. The list would also include spouses of any of these people.

4. Use unused funds to make student loan payments

529 accounts can be used to pay up to $10,000 in lifetime student loan payments. This could apply to multiple siblings in a family, allowing $10,000 in repayment for each of them.

5. Take a penalty-free distribution for scholarship funds

While earnings are taxable, a distribution of up to the scholarship amount can be taken without a 10% penalty.

6. Transfer to an ABLE account

The Tax Cuts and Jobs Act, passed by Congress in 2017, made it possible for 529 funds to be repurposed in the event the beneficiary (or a member of the beneficiary’s family) has or develops a disability. Each year a 529 account owner may roll up to the federal estate gift tax annual exclusion amount ($19,000 for 2026) to an ABLE account. ABLE accounts, created in 2014, are designed to help families save for individuals with disabilities and function similarly to 529 plans. Funds can be used for a broad range of qualified expenses, including education, transportation, housing and other disability-related needs. Importantly, up to $100,000 in an ABLE account is generally not counted as a resource for most federal benefit programs, preserving eligibility for critical support.

7. Funds from 529 plans can always be used for other purposes

There is the option to take a non-qualified withdrawal from a 529 plan to utilize the funds for other purposes. Account earnings would be subject to taxation as well as a 10% penalty when distributed. 529 plans are no longer just about saving for college. For families concerned about overfunding, the real risk may be underestimating how versatile these plans have become.

Endnotes

¹ Source: College Savings Plan Network, 2025.

² Source: “How America Pays for College.” Sallie Mae. 2024.

³ Under normal rules, the ability to make a Roth IRA contribution is phased out once modified adjusted gross income exceeds $153,000 ($242,000 for married couples filing a joint tax return).

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