I have some 529s for grandchildren which are way overfunded. Using 529 for qualified expenses is great, especially if the 529 have a lot of appreciation. However overfunding it is not too good an idea. It becomes a deferred investment, but not a good one.
1. When you withdraw, the earnings on withdrawal gets hit with a 10% penalty. It is ordinary income tax and not capital gain.
2. You can only change investment twice a year.
3. Changing investment may take a couple of days.
4. Investment choices are limited.
I know I can transfer the funds to another beneficiary, but am concerned of the fact that implicitly I have gifted the money to them. I have kept them updated of their 529 accounts. Now I am removing it from their account and give it to someone else. It may create friction between the grandchildren and me (and also the person that I transfer the fund to).
I have stopped contributing new money.
Welcome any comments,