unused 529 - best options for cashing out

[ppalm]

I live in Florida and purchased a FLorida Prepaid College Plan for my son. He is now 22 and will not be using the plan. I have been hesitant to cash it out because I am not sure how that money will be handled in my taxes. Can you tell me what options I have? I suspect there will be a penalty for withdrawl and possibly it will count as income? But I have already been taxed on it as income and I also can't help that he can't use the plan (due to mental illness). please advise my best approach. Is it possble to roll into a retirement plan for example to avoid penalties? thank you. 

[EleanoreS · Accepted solution]

The funds you put into the plan should not be taxed when withdrawn. The earnings could be subject to tax and penalties if the funds are not used for qualified expenses.

The good news is that you do have a few options.  The Tax Cuts and Jobs Act (TCJA) of 2017 made a significant change that may benefit your son.  Limited amounts can be rolled over from a 529 plan to an ABLE account.  Funds from an ABLE account can help designated beneficiaries pay for qualified disability expenses.

Another option, available since January 2024 under the Secure Act 2.0, is that unused funds, up to $35,000,  from a 529 plan can be rolled over into a Roth IRA in the beneficiary’s name.

Here is a link to an article I wrote for the Intuit Accountant’s Tax Pro Center that will provide additional information on 529 plans.

Thank you for joining us at the Ask the Expert event today!