When your child doesn't need a 529 education savings plan after all
Life is full of surprises. Whether your child earned a full scholarship to the college of his choice or opted to become a full-time artist instead, your 529 savings plan is still a valuable investment. Maybe the money won’t be used as you originally intended, but you can still benefit from the flexible options available to you.
Key takeaways
- Be assured that the money you've saved is all yours, no matter what.
- Look for other ways to use the assets in your 529 savings plan.
- Consider transferring the account to another beneficiary.
Life lessons
Congratulations on putting aside a chunk of money for your child's education. Sometimes life doesn't go exactly as planned and your child chooses a different path. That's okay too. The money you've saved in your 529 savings plan can still be put to good use.
Your money, your choice
You’re willing to put a bit of money aside so that college will be within reach for your child. But what if she's on a different page and won’t need that 529 savings plan for college after all? Rest assured that the money you save in a 529 savings plan is always yours and always accessible. In fact, the flexibility of the plan is one of its greatest benefits.
Pursue another path
The money in a 529 savings plan isn’t limited to four-year universities. Community colleges, seminaries or trade schools ... any path your child chooses that involves professional training likely is eligible for a 529 savings plan. Even expenses for fees, books, supplies and equipment required to participate in certain apprenticeship programs are qualified expenses. You can start your search for accredited choices on the U.S. Department of Education database.
And keep in mind that you can use the funds for more than just tuition and training. Related supplies and equipment — from textbooks to laptops — are qualified expenses.
Leave it alone
If your child isn’t college-bound today, it doesn’t mean he won’t change his mind later. Your 529 savings plan account can continue to grow tax-free for decades to come, so there’s no rush to make any changes.
Change beneficiaries
One of the best perks of a 529 savings plan is that you have the option of transferring the account to another beneficiary. The new beneficiary can use those funds for all the same educational expenses — including room and board, tuition and books. You might consider rolling this account into a sibling’s 529 savings plan, for instance.
Take the cash
Keep in mind that as long as the money is used for a qualified education expense, it is tax-free. If used for something else, you’ll pay federal and sometimes state income taxes on any gains, as well as a 10% federal tax penalty. States take different approaches to the income tax treatment of withdrawals. For example, withdrawals for K-12 expenses may not be exempt from state tax in certain states. (If that dream scholarship comes through, you are allowed to withdraw the amount of that scholarship with no penalty.)
The amount you originally invested (the principal) will never be taxed, but withdrawing the gains will trigger additional costs. You’ll want to consider your options and carefully craft a strategy that lets you keep as much of your money as possible.
Pay toward a student loan
If a beneficiary takes on student loan debt, you can use 529 assets to make payments toward the principal or interest on qualified student loans (up to $10,000 lifetime maximum for the designated beneficiary and each of their siblings). Remember, you can designate yourself as the beneficiary.
Use it for primary education
The assets in a 529 savings plan can be used for tuition at private K-12 schools (up to $10,000 a year). Perhaps a younger child can take advantage of the money you saved. Or if you know for a fact that your child isn’t interested in pursuing higher education, you can possibly start spending even before high school graduation. Note that not all states allow K-12 tuition as a 529 savings plan qualified expense for state tax purposes.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
This material does not constitute legal or tax advice. Investors should consult with their legal or tax advisors.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
American Funds Distributors, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.