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What Happens to a 529 Plan If a Child Doesn't Go to College?

November 26, 2020
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Sootchy Team

If you began saving for your child's education early with a 529 plan but they decided not to go to college, what can you do with that money? Our 529 experts explain.

What Happens to a 529 Plan If a Child Doesn't Go to College?

For decades now, children around the country have been told that a college education an essential step on the path to financial and professional success, but that commonly accepted wisdom doesn’t hold true in all cases. For those entering a variety of industries, hands-on experience and technical skills can be more important than a college degree, so there’s a chance your child might not need to pay the high cost of tuition. However, many parents start preparing for college around the time their child is born by opening a 529 plan, a tax-free investment option that can only be used for certain education-related expenses. If you have one such account that’s been building in value for years, what happens to that 529 plan if your child doesn’t go to college? To find out, keep reading as the experts at Sootchy provide the answers you’re looking for.

Can You Take Money Out of a 529 Plan for If Your Child Doesn’t Go to College?

The first question on many parents’ minds when they find out that their 529 plan won’t be going toward a college education is whether they can take the money out of the 529 account. Technically, the answer to this question is yes; an account owner has full access to the funds in their 529 plan at all times, regardless of the age or educational status of the beneficiary. However, using funds for what Internal Revenue Code Section 529 calls “non-qualified distributions” – expenses not considered acceptable for 529 plans – you could face a steep penalty.

Under most circumstances, taking funds out of a 529 plan for something other than college will result in the account’s earnings being subject to income taxes at both the state and federal levels, plus a 10% penalty. That said, there are a few instances in which a parent can avoid the standard penalty, depending on the reason why their child isn’t going to college – namely, if their child is no longer physically or mentally capable due to illness, injury, or death. In addition, those whose 529 plan is no longer needed because their child received a scholarship or enrolled in a military academy can access their gains penalty-free, though income tax will still apply.

It’s also worth noting that the money in a 529 plan won’t go bad; you can keep those funds in place and allow them to continue growing until you have an education-related use for them. Maybe your child decides down the road that they want to attend college after all, or maybe you decide that you want to take some courses yourself. Also, if your child has a disability, you can roll over funds in your 529 college savings plan into an ABLE account, which can be used for a wide variety of expenses, including healthcare and equipment costs. In any case, you may still be able to find another use for your 529 plan, such as the options outlined below.

Using 529 Plans for Apprenticeships and Trade Schools Instead of College

Just because your child isn’t going to a traditional four-year college or university doesn’t mean that you can’t use the funds in your 529 plan to further their education or career. Many teens decide that they’d rather attend a trade school or enter into an apprenticeship program – two potentially pricy endeavors that can be covered with a 529 plan, as long as it’s a college savings plan and not a prepaid tuition plan.

If your child chooses a trade or vocational school over college, you can use a 529 plan to pay for things like tuition, books, tools and equipment, room and board, and other essential costs. Anyone entering into an apprenticeship can also use a 529 plan to cover their fees and the cost of equipment or materials, allowing those who pursue a path other than college to excel in their field as well.

Using Your 529 Plan for Another Child

In addition to colleges, apprenticeships, and trade schools, 529 plans can now be used to pay for a child’s education at the elementary or secondary level, up to a certain amount – good news for parents with younger kids. If you have funds left over in a 529 plan because an older child decided not to go to college, you can change the beneficiary and put up to $10,000 per child per year toward public, private, or religious schooling for your child. And if that child eventually elects to go to college, you’ll have the funds to help pay for it.

In the event that your other child is older and already graduated college, keep in mind that your 529 plan can be used to help pay down their student debt as well. Up to $10,000 (per beneficiary) can be paid out of a 529 plan to cover student loan payments, as well as $10,000 per sibling. This number is a lifetime limit, unfortunately, but changing the beneficiary may provide a workaround if you want to contribute more than that amount.

Get Started with a 529 Plan for Your Child with Help from the Team at Sootchy

There are a lot of factors to consider when picking a 529 plan, such as what investment options a plan offers, what fees it carries, and how the funds can be used. Thanks to the team at Sootchy, though, this process is easier than ever. Learn how you can open or manage a 529 plan for your child by visiting us online or downloading our smartphone app today.

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