What to do if your child is not going to college 529 Plan

You’ve been saving for years in a 529 plan, which allows you to fund your child’s college expenses tax-free. But what if your child doesn’t go to college? Will you face a hefty tax bill?

Don’t worry. Money in a 529 account can be used tax-free for many types of schooling, not just the cost of a four-year college. Even if your child is not pursuing any type of higher education, you can use the savings in a number of ways.

There is also no time limit on using the funds. “A 529 never expires,” says Mark Kantrowitz, former publisher of Savingforcollege.com, a website that provides information about 529s and allows you to compare state-funded plans. This gives you leeway to decide how to spend the money if your child is on a different track.

Saving for a 529 is still one of the best ways to save for college because you get a huge tax deduction if you use it for qualified educational expenses.30 More than 30 states also offer tax deductions for your contributions.

Tax breaks and rising college tuition are encouraging more families to save money in these accounts. According to ISS Market Intelligence, assets in 529 savings plans reach $388 billion by the second quarter of 2022, up from $348 billion in the second quarter of 2020.

Still, “most families don’t have enough money for college or don’t save at all,” Kantrowitz said. According to a 2020 survey (PDF) by Sallie Mae, a provider of student loans, less than half of households (48 percent) have saved for college. Only one-third of families saving for college use 529 plans, the survey found.

Even if you don’t have a lot to pack, it’s easy to get started. In most states, you can open a 529 for as little as $25. Some states – Utah – have 529 plans with no minimum contribution.

Having an account, even if it’s small, can be a powerful incentive to go to college and graduate. According to a 2017 report from the Institute, even before reaching college age, a child with any type of college savings account under $500 is three times more likely to go to college and four times more likely to earn a degree than a child without a degree Higher Education Policy and Business Development Corp.

Even if your child doesn’t choose the traditional college route, it’s wise to deposit a 529. Here’s why.

529s don’t just apply to four-year colleges
You can use funds in a 529 at any institution of higher education that receives financial aid. This includes community colleges; technical, art or music schools; vocational and certificate programs; trade schools; and continuing education programs. For more detailed information on researching eligible schools and programs, you can start here.

The money can also be used to pay for study abroad programs. kantrowitz says that about 400 colleges in other countries are eligible to use the $529.

The only caveat is that you must use your 529 savings for eligible expenses. This includes tuition, fees, books, supplies and computers, as well as room and board for students who are enrolled at least half the time. It does not cover expenses such as college application fees, personal living expenses or transportation costs.

Family members can use the money
Most 529 plans allow you to change beneficiaries once a year. So, if your child will not be using the money, you can transfer the assets to an eligible family member, such as the account owner (usually a parent or grandparent) or a close relative, at no cost to you.

The list of eligible family members is extensive – it could be a sibling, aunt, uncle, niece or nephew, step-sibling, parent, stepparent, spouse or cousin of all of these individuals.

What if your child changes his or her mind? You can switch a 529 account back to the original beneficiary at any time.

You can pay for some special needs
If your child has a documented physical or emotional disability, you can click 529 to pay for certain types of support. This money can pay for services that enable him or her to attend postsecondary school. If the disability prevents the student from attending school, you can withdraw the money without penalty, but you will still have to pay income tax on the income.

You can also transfer assets from a 529 plan to an ABLE (Achieving a Better Life Experience) account – a savings vehicle for people with disabilities – without penalty. However, the ABLE account and the 529 account must be the same beneficiary or another member of your family with special needs.

K-12 Private School Fees May Qualify
For those who have children in non-public elementary or secondary schools, federal tax law allows another option for 529 money. You can withdraw up to $10,000 without paying federal income tax to pay for private or religious elementary and secondary school tuition. (Check your state’s rules first, as some people do not consider private school tuition a qualified expense.)

But unless you have extra savings, be careful with your 529 money until your child goes to college. “By providing a longer window of opportunity for growth in your assets, the greater the potential for tax-free growth you may have in your plan,” says Faron Daugs, a certified financial planner in Libertyville, Ill.

However, for those who can expect to afford college, the option of using 529 savings to cover K through 12 expenses makes sense, says Tom Fredrickson, a certified financial planner in Brooklyn, N.Y.

“This is especially true if the alternative is to use funds that must be taxed, such as capital gains investments or funds in a retirement account,” Frederickson said.

Cashing out may not generate a big tax bill
If all else fails, you can make a direct withdrawal – which may not cost you as much in taxes as you think. The withdrawal amount will be taxed at the beneficiary’s tax rate, which may be lower if it’s your child. You will pay a 10% penalty, but this is only for income growth, not the full value of the account.

In some cases, you may not be penalized at all. No penalty applies if the beneficiary dies or becomes disabled, or if he or she enters the U.S. Military Academy. If your child receives a scholarship, you may withdraw the maximum amount of the scholarship and spend it on anything you want. However, when you make a withdrawal, you will be required to pay income tax on any earnings in the account.