What to do with a 529 plan if your child doesn’t need it for college

Overfunded 529 plans are a common concern. You may have young children and be unsure how much they’ll need for college. Maybe you saved enough for an expensive school but the best fit for your child turned out to be a more affordable option. Or perhaps your child doesn’t plan to go to college at all. Fortunately, a variety of ways allow you to avoid paying federal income taxes and a 10% penalty on your plan’s earnings if you use that money for other purposes. State tax treatment of these options can vary, so to ensure you understand all the tax-related issues of a 529 plan, consult with your tax advisor.

1. Use the money for other types of advanced education. 

Many people think of a 529 plan as just a college funding vehicle, but it’s actually far more versatile. Your child could use the funds to pay for qualified expenses in an apprenticeship program registered with the U.S. Department of Labor. These programs, which are typically offered at trade or vocational schools, provide valuable career-oriented training in a number of fields. To be eligible to use the 529 plan, your child must be enrolled in a trade/vocational school that participates in a student aid program run by the U.S. Department of Education.

2. Help pay off student loans.

You may have other children who took out student loans, or you might still be paying off some of your own, and you can now use 529 plan proceeds to help pay these off. A $10,000 maximum lifetime limit applies for a beneficiary and each sibling. For example, your 529 beneficiary didn’t go to college but they have two older siblings with student loans. Up to $10,000 per sibling can be withdrawn without federal taxes or penalties to pay down these debts, provided you make the loan payment in the same year you withdraw the funds. Alternatively, if you change the beneficiary to yourself, you may be able to use your child’s 529 plan to help pay off some of your own student loans.

3. Pay for qualified K-12 expenses.

If you’ve got younger kids in private school, you may be able to use 529 plans to pay up to $10,000 per student, per year, for qualified K-12 expenses (which typically includes tuition and necessary fees). As is the case with 529 plans used for college, your earnings and withdrawals are free of federal taxes if the money is used for qualified expenses.

4. Roll over the funds to a Roth IRA for the beneficiary.

The new SECURE 2.0 law provides some increased flexibility for unused 529 assets. Beginning in 2024, 529 account owners can roll over unused 529 assets to a Roth IRA for the beneficiary, subject to certain criteria and limits.

5. Change beneficiaries.

Is there someone else who could benefit from the 529 plan? The process to switch beneficiaries is quite simple. Alternatively, you can roll it over to another 529 plan, which can be done once every 12 months per beneficiary. There shouldn’t be any federal taxes or penalties as long as the new beneficiary is a qualified family member of the current beneficiary. So, if your child opts out of college, you can name a younger sibling or even a niece or nephew or potentially another relative. And you can even name you or your spouse as the beneficiary if you’re interested in furthering your education.

6. Leave the account intact.

If your child is simply not sure about college or perhaps wants to delay applying, you can keep your 529 plan intact until the child does use it for qualified education expenses. You could even leave it for future generations since contributions to a 529 plan are generally considered completed gifts for tax purposes and are removed from your estate.

Your financial advisor can help you determine how a 529 plan can fit into your overall financial strategy. It’s a valuable tool for helping your family members explore the educational opportunities that can lead to a promising future.