What Happens to a 529 if the Child Doesn’t Go to College?

A 529 plan serves as a tax-advantaged savings vehicle specifically designed to help families cover future education expenses. These plans allow contributions to grow tax-deferred, and withdrawals used for qualified educational costs are typically free from federal income tax. However, circumstances can change, and the original beneficiary may not pursue higher education, or funds may remain after their educational journey concludes. Understanding the various options available for managing these funds is important for account owners.

Understanding Qualified Expenses Beyond Traditional College

The scope of “qualified education expenses” for 529 plans extends beyond tuition and fees at four-year universities. Funds can be used for a diverse range of educational pursuits at eligible institutions, which are generally any post-secondary school that participates in a student aid program run by the U.S. Department of Education.

For instance, qualified expenses include costs associated with vocational schools and trade schools, which offer specialized training for specific occupations. Additionally, fees, books, supplies, and equipment required for apprenticeship programs registered with the U.S. Department of Labor under the National Apprenticeship Act also qualify.

Furthermore, 529 funds can be applied to K-12 tuition expenses, with a federal limit of up to $10,000 per student per year for attendance at public, private, or religious elementary or secondary schools. This annual limit on K-12 tuition expenses is set to increase to $20,000 per year per student starting in 2026. Beyond tuition, as of July 4, 2025, qualified K-12 expenses will expand to include curriculum, books, tutoring, and testing fees. Another qualified use for 529 funds is student loan repayment, with a lifetime limit of $10,000 per individual beneficiary. This applies to both the beneficiary’s loans and those of their siblings, offering a way to mitigate educational debt.

Changing the Beneficiary

Account owners have the flexibility to change the beneficiary of a 529 plan without incurring taxes or penalties, provided the new beneficiary is an eligible family member of the original beneficiary. This option is particularly useful if the initial beneficiary decides not to attend college, receives a scholarship that covers their costs, or simply has leftover funds. The Internal Revenue Service (IRS) provides a definition of a “member of the family” to include:

Sons, daughters, stepchildren, foster children, adopted children, and their descendants.
Siblings, step-siblings, parents, and stepparents.
Aunts, uncles, nieces, nephews, and first cousins of the original beneficiary.
Relatives by marriage, including sons-in-law, daughters-in-law, brothers-in-law, sisters-in-law, fathers-in-law, and mothers-in-law.

The process for initiating a beneficiary change typically involves contacting the plan administrator and completing specific forms, which are often available on the plan’s website.

Rollover to Roth IRA

A more recent option, introduced by the SECURE Act 2.0 and effective January 1, 2024, allows for the rollover of unused 529 funds into a Roth IRA for the benefit of the 529 plan beneficiary. This provision offers an opportunity to convert education savings into retirement savings without incurring taxes or penalties, provided specific conditions are met.

The 529 account must have been open for at least 15 years. Additionally, any contributions or earnings on contributions made to the 529 plan within the last five years are not eligible for this type of rollover. The amount rolled over annually is subject to the Roth IRA’s annual contribution limits, which for 2025 is $7,000, or $8,000 for individuals aged 50 and older. There is also a lifetime maximum rollover limit of $35,000 per 529 account beneficiary. The Roth IRA must be owned by the 529 plan beneficiary, and they must have earned income at least equal to the amount being rolled over in that year.

Non-Qualified Withdrawals and Their Consequences

When 529 plan funds are withdrawn for purposes that do not meet the definition of qualified education expenses, these are considered non-qualified withdrawals and trigger specific financial consequences. The earnings portion of such a withdrawal becomes subject to federal income tax at the account owner’s ordinary income tax rate.

In addition to income tax, a 10% federal penalty tax typically applies to the earnings portion of the non-qualified withdrawal. The earnings portion subject to tax and penalty is determined proportionally based on the ratio of earnings to contributions in the account.

However, there are several exceptions to the 10% federal penalty tax. This penalty may be waived if the beneficiary dies or becomes disabled. Another exception applies if the beneficiary receives a tax-free scholarship; in this case, withdrawals up to the scholarship amount are exempt from the penalty, though the earnings remain taxable. Attendance at a U.S. military academy also qualifies for a penalty waiver up to the cost of attendance. While these exceptions can prevent the penalty, the earnings portion of the withdrawal remains subject to federal income tax.