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

A 529 plan is a tax-advantaged savings vehicle for educational expenses. Funds grow tax-free, and withdrawals are federal tax-free when used for qualified education costs. A common concern arises when the beneficiary does not pursue higher education, prompting questions about managing the funds.

Understanding Non-Qualified Withdrawals

A non-qualified withdrawal occurs when 529 funds are not used for eligible education expenses. The earnings portion of the withdrawal becomes subject to the account holder’s ordinary federal income tax rate and a 10% federal penalty tax. Original contributions, made with after-tax dollars, are returned without federal tax or penalty.

The 10% federal penalty tax may be waived in specific exceptions, even if the withdrawal is not for qualified educational expenses. These include the death or disability of the beneficiary. If the beneficiary receives a tax-free scholarship, an amount up to the scholarship value can be withdrawn without penalty, though earnings remain taxable. Attendance at a U.S. military academy also allows penalty-free withdrawals up to the cost of attendance, with earnings still subject to income tax.

Exploring Alternative Uses for Unused Funds

Changing the Beneficiary

Changing the designated beneficiary is a flexible option for unused 529 funds. This can be done without tax consequences to another eligible family member of the original beneficiary. The IRS broadly defines eligible family members, including siblings, children, parents, aunts, uncles, nieces, nephews, first cousins, and in-laws.

This allows account owners to redirect funds if the initial beneficiary does not attend college or has remaining funds. Funds can be transferred to a younger sibling, a grandchild, or even to the account owner if they pursue further education. This tax-free change preserves the plan’s benefits within the family.

Rollover to an ABLE Account

Funds from a 529 plan can be rolled over to an ABLE (Achieving a Better Life Experience) account for an eligible individual with a disability. An individual qualifies if their disability began before age 26 (increasing to 46 in 2026). This option helps save for qualified disability-related expenses without jeopardizing government benefits.

Annual contributions to an ABLE account, including 529 rollovers, are limited to the federal annual gift tax exclusion amount ($19,000 for 2025). Working ABLE account owners not participating in an employer-sponsored retirement plan may contribute an extra amount annually, up to the lesser of their earned income or the federal poverty level for a one-person household (up to $15,650 for 2025 in the continental U.S.).

Rollover to a Roth IRA

The SECURE Act 2.0 (2022) introduced a provision allowing limited rollovers from 529 plans to Roth IRAs. This option can boost retirement savings for the beneficiary if educational funds are not fully utilized. The Roth IRA must be in the 529 plan beneficiary’s name.

Conditions and limitations apply to these rollovers. The 529 account must be open for at least 15 years, and contributions or earnings deposited within the last five years are not eligible. There is a lifetime maximum rollover limit of $35,000 per beneficiary. Annual rollover amounts are capped at the Roth IRA contribution limit for that year ($7,000 for 2025, or $8,000 if age 50 or older).

Saving for Future Educational Pursuits

Account holders can leave funds within the 529 plan for future educational needs. Funds do not expire and can be used decades later. This offers flexibility for the current beneficiary to pursue graduate school, vocational training, or other continuing education later.

Alternatively, funds can be saved for a future beneficiary, such as potential grandchildren. Maintaining funds in the 529 plan allows them to continue growing tax-deferred, preserving investment potential. This long-term perspective benefits families planning for future generations’ educational needs.

Implementing Your Chosen Path

Changing a beneficiary typically involves contacting the 529 plan administrator. Account owners usually complete a specific form, online or by mail, providing account number, owner’s information, and details for current and new beneficiaries, including Social Security Numbers. Some plans may require a Medallion Signature Guarantee.

Initiating a rollover (to another 529 plan, ABLE account, or Roth IRA) can be done through direct or indirect methods. A direct rollover involves plan administrators transferring funds directly between accounts. For an indirect rollover, the account owner withdraws funds and must redeposit them into the new account within 60 days to avoid tax implications. Missing this 60-day window results in a non-qualified withdrawal.

Requesting a withdrawal, qualified or non-qualified, generally involves submitting a request to the 529 plan administrator. This can be done online, by phone, or via paper form. Administrators can disburse funds to the account owner, beneficiary, or directly to an educational institution. Request withdrawals in the same tax year qualified expenses are incurred for proper tax reporting.

Regardless of the chosen path, account holders receive IRS Form 1099-Q from the 529 plan administrator for any distributions. This form reports the total distribution, earnings, and basis (contributions). Retain this form and records of educational expenses to accurately report withdrawals on tax returns, especially if any portion is non-qualified.