What Happens to 529 if Kid Doesn't Go to College?

Even if the designated beneficiary decides not to pursue a traditional four-year university education, the funds within a 529 plan offer considerable flexibility for other educational paths or can be reallocated to avoid penalties.

Flexible Educational Uses for 529 Funds

A 529 plan is designed to be versatile, allowing funds to be used for a wide array of post-secondary educational expenses beyond just traditional four-year colleges.

• Eligible Educational Institutions: Funds can be used at virtually any eligible educational institution offering higher education beyond high school. This broad definition includes many options.
• Vocational and Trade Schools: The money can be applied towards tuition and expenses at vocational or trade schools. This is permissible as long as the institution is eligible to participate in a student aid program run by the U.S. Department of Education.
• International Programs: Certain overseas educational institutions are also recognized as eligible for 529 distributions, providing options for international study.
• Apprenticeship Programs: Qualified apprenticeship programs registered with the Department of Labor can also utilize 529 funds for associated expenses like fees, books, supplies, and equipment.
• Other Qualified Expenses: Beyond tuition, 529 funds can cover a range of qualified education expenses, including:
  • Room and board (for students enrolled at least half-time).
  • Books, supplies, and equipment.
  • Computers, peripheral equipment, software, and internet access, if primarily used for educational purposes.

Other Options for Managing 529 Funds

If the designated beneficiary chooses not to pursue any form of higher education, there are several strategic alternatives to consider before taking a non-qualified withdrawal. These options help preserve the tax-advantaged growth of your savings.

Change of Beneficiary

One of the simplest ways to repurpose unused 529 funds is to change the beneficiary. The new beneficiary must be an eligible family member of the original beneficiary. This includes:

• A sibling (including half-siblings and step-siblings)
• A parent or stepparent
• A grandparent
• Aunt or uncle
• Cousin
• Spouse
• The account owner themselves (e.g., for continuing education or a career change)

This allows the funds to continue growing tax-free for another individual's educational pursuits.

Rollover to Roth IRA

Thanks to the SECURE Act 2.0, a significant new option exists: rolling over unused 529 funds to a Roth IRA for the benefit of the 529 beneficiary. This option comes with specific conditions:

• The 529 account must have been open for at least 15 years.
• The rollover amount is subject to the annual Roth IRA contribution limits for the beneficiary.
• There's a lifetime maximum rollover limit (currently $35,000 per beneficiary).
• Funds contributed to the 529 within the last five years are not eligible for rollover.

This provides an excellent pathway for beneficiaries to jumpstart their retirement savings with funds that might otherwise be subject to taxes and penalties.

Save for Future Educational Needs

Even if immediate college plans are off the table, the 529 account can be kept open for potential future educational needs. The beneficiary might decide to attend graduate school, pursue a certification, or enroll in a vocational program later in life. Alternatively, the funds can be held for a future child or grandchild.

Understanding Non-Qualified Withdrawals

If none of the above options are viable and funds are withdrawn for purposes other than qualified education expenses, these are considered non-qualified withdrawals. Such withdrawals can lead to financial consequences:

Exceptions to the 10% additional tax may apply in certain circumstances, such as if the beneficiary dies, becomes disabled, or receives a tax-free scholarship, but the earnings portion would still be subject to ordinary income tax.