Decoding KEES: Where Does Unspent Money Go?

So, you’ve navigated the labyrinthine world of college savings and invested in a Kansas Education Savings Program (KEES) account. Smart move! But what happens to the money if your child doesn’t use it all for qualified higher education expenses? The answer, in short, is that unused KEES money doesn’t simply vanish. It has several potential pathways, all dictated by the account owner’s decisions and adhering to KEES program guidelines and federal tax regulations. We’ll explore these options in detail, but first, let’s break down those crucial choices.

Understanding the Fate of Unspent KEES Funds

Essentially, the future of unused KEES funds rests on several key actions:

• Keeping the Account Active: The money can remain in the KEES account, continuing to grow tax-deferred. This is a great option for those anticipating future educational expenses.
• Changing the Beneficiary: You can designate a new beneficiary, a qualifying family member of the original beneficiary, to utilize the funds for their education.
• Non-Qualified Withdrawals: The money can be withdrawn for non-educational purposes, subject to income tax and potentially a 10% federal tax penalty on the earnings portion of the withdrawal.
• Rolling Over to Another 529 Plan: While KEES accounts aren’t technically 529 plans, they are often managed in a way that allows for funds to be rolled over into a traditional 529 plan.
• Using it for Qualified K-12 Education Expenses: With some limitations, KEES funds can now be used for tuition at an elementary or secondary public, private, or religious school.
• Using it for Qualified Apprenticeship Programs: With some limitations, KEES funds can now be used for apprenticeship expenses, such as fees, books, supplies, and equipment required for the registered program.
• Using it for Student Loan Repayment: KEES funds can now be used to pay off student loans, with a lifetime limit per beneficiary.

Let’s delve deeper into each of these scenarios and uncover the nuances involved.

Exploring the Options in Detail

Keeping the Account Active for Future Education

Perhaps your child decides to pursue a different educational path, or maybe they delay their studies. The beauty of a KEES account is its flexibility. You can keep the account active, allowing the funds to continue growing tax-deferred. This is especially beneficial if you foresee future educational expenses for the original beneficiary or potentially a new one. Market fluctuations will continue to affect the account balance, so it’s crucial to regularly review your investment strategy.

The Power of Changing the Beneficiary

Life throws curveballs. Maybe your child decides higher education isn’t for them. Fortunately, KEES allows you to change the beneficiary to a qualifying family member. This includes siblings, step-siblings, parents, stepparents, spouses, children, stepchildren, nieces, nephews, aunts, uncles, first cousins, in-laws, and ancestors of the original beneficiary. This strategic move ensures the funds remain earmarked for education within your family, maximizing the initial intention of the savings plan.

Understanding the Implications of Non-Qualified Withdrawals

While not the ideal scenario, taking a non-qualified withdrawal is an option. However, be prepared for the tax implications. The earnings portion of the withdrawal is subject to both federal income tax and a potential 10% federal tax penalty. This penalty is designed to discourage using the funds for non-educational purposes. Consult with a tax advisor to fully understand the consequences before making this decision. It’s also worth noting that state tax treatment may vary.

Rolling Over to Another 529 Plan

While KEES and 529 plans are not exactly the same thing, the IRS allows rollovers between them under certain conditions. This might be useful if you move out of Kansas or find a 529 plan with investment options that better suit your needs. Make sure to follow the IRS rules for rollovers to avoid any tax penalties. The key is to complete the rollover within 60 days.

Using KEES for Qualified K-12 Education Expenses

Recent changes in federal law have expanded the permissible uses of 529 plans (and, by extension, some KEES account functionalities) to include qualified tuition expenses at elementary and secondary schools. This can be a significant benefit for families choosing private or religious schooling for their children. There are, however, limits to how much can be withdrawn tax-free each year. Always verify the specifics with KEES administrators and the IRS.

Leveraging KEES for Qualified Apprenticeship Programs

Another expansion in eligible expenses includes registered apprenticeship programs. This is a game-changer for students pursuing skilled trades. Expenses covered include fees, books, supplies, and equipment directly related to the apprenticeship. This broadens the scope of KEES beyond traditional college pathways.

Utilizing KEES for Student Loan Repayment

Perhaps the most recent and significant change is the allowance of using KEES funds for student loan repayment. While there are limitations – including a lifetime limit per beneficiary – this provides a valuable option for graduates burdened by student debt. This can significantly ease their financial burden and contribute to their overall financial well-being.

KEES FAQs: Unveiling the Nuances

Here are 12 frequently asked questions to further illuminate the intricacies of unused KEES money:

1. What constitutes a “qualified higher education expense”?

Qualified higher education expenses typically include tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Room and board can also qualify, but are often capped at the school’s published cost of attendance.

2. How do I change the beneficiary of my KEES account?

Contact the KEES program administrators directly. They will provide you with the necessary forms and instructions for changing the beneficiary. You’ll need to provide documentation to verify the new beneficiary’s eligibility as a qualifying family member.

3. What happens if the original beneficiary passes away?

In the unfortunate event of the beneficiary’s death, the account owner can choose a new beneficiary, usually another family member. The assets can also be distributed to the account owner’s estate, subject to applicable taxes and penalties.

4. Are there any state tax benefits associated with contributing to a KEES account?

Kansas may offer state tax deductions or credits for contributions to a KEES account. Consult with a tax professional or review Kansas tax laws for the most up-to-date information.

5. Can I contribute to both a KEES account and a traditional 529 plan for the same beneficiary?

Yes, it is generally permissible to contribute to both a KEES account and a separate 529 plan for the same beneficiary. However, be mindful of contribution limits and potential tax implications across all accounts.

6. How are KEES accounts invested?

KEES accounts offer a range of investment options, typically including age-based portfolios that automatically adjust their asset allocation as the beneficiary approaches college age. You can also choose more conservative or aggressive investment strategies based on your risk tolerance and time horizon.

7. Can I withdraw only a portion of the unused KEES money?

Yes, you can make partial withdrawals from your KEES account. Remember to carefully document the expenses to ensure they qualify as qualified education expenses.

8. What are the potential tax implications if I move out of Kansas?

Moving out of Kansas does not necessarily trigger any immediate tax consequences on your KEES account. However, the state tax benefits associated with contributions may no longer apply. Rolling over the funds to a 529 plan in your new state might be a suitable option.

9. Does financial aid get affected by KEES?

Yes, KEES accounts are considered an asset of the parent if the parent owns the account, or the student if the student owns the account, when determining financial aid eligibility. However, the impact is typically less significant than other assets, and some schools may treat 529 plans more favorably.

10. What is the deadline for using KEES money?

There is no specific deadline for using KEES money. The funds can remain in the account indefinitely, allowing for future educational expenses or a change of beneficiary.

11. Can KEES funds be used for graduate school?

Yes, KEES funds can be used for qualified higher education expenses at eligible institutions, including graduate schools.

12. How do I find a qualified apprenticeship program?

You can find a list of registered apprenticeship programs on the U.S. Department of Labor’s website or by contacting local trade unions or apprenticeship organizations.

In conclusion, unused KEES money offers a spectrum of possibilities, ensuring that your educational savings remain valuable and adaptable to changing circumstances. By understanding these options and seeking professional advice, you can make informed decisions that maximize the benefits of your KEES account.