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 will 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, trade schools or certain apprenticeship programs … any path your child chooses that involves professional training likely is eligible for a 529 savings plan. Find a full list of accredited choices on the FAFSA website.
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.
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.
You can change the beneficiary at any time, as long as he or she is a member of the family of the previous beneficiary. Get this: A member of the family generally includes the beneficiary’s descendants, the beneficiary's brothers, sisters, parents, uncles, aunts, in-laws, spouses — even first cousins. And you can be a beneficiary, too.
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.
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.
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.
Pay toward a student loan
If a beneficiary takes on student loan debt, you can use 529 assets to make payments on certain 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.