Did you set up your Section 529 account for a child who is graduating in May? It doesn’t mean that the good times have to end.
Strategy: Roll over any unused funds into an account for another child. The rollover is completely exempt from tax.
In other words, you don’t have to shut down the Section 529 plan after one of your children is out of school. The only requirement is that distributions must begin by the time the last beneficiary turns age 30.
A Section 529 plan is an educational savings plan operated by one of the states. As long as certain requirements are met, there’s no income tax on the accumulation of earnings within the plan, plus qualified distributions for amounts like tuition are exempt from tax. Furthermore, contributions to the plan may be sheltered from gift tax by the annual gift tax exclusion. (You can make five years’ worth of contributions in one year.)
What happens when your youngest child graduates? You can close down the account simply by notifying the plan administrator and pocketing the remaining balance, if any. But there’s a tax price to pay at this point: You will owe tax on the portion of the distribution representing earnings.