What to Do With a 529 if Your Child Doesn’t Go to College

A 529 plan serves as a tax-advantaged savings vehicle designed to help families cover future education expenses. While typically associated with traditional four-year college degrees, a common concern arises when the intended beneficiary decides not to pursue such an educational path. Account owners have several options to manage these funds effectively, allowing for continued tax benefits or pathways to utilize the savings with minimal financial impact.

Understanding Non-Qualified Withdrawals

Withdrawing funds from a 529 plan for purposes not deemed “qualified education expenses” is a non-qualified withdrawal. The earnings portion of such a withdrawal is subject to the account owner’s ordinary income tax rate, and a 10% federal penalty tax typically applies to these earnings. Principal contributions made to a 529 plan are never taxed or penalized upon withdrawal, as these funds were contributed with after-tax dollars.

There are specific exceptions where the 10% federal penalty tax may be waived. These exceptions include situations where the beneficiary dies or becomes disabled. The penalty is also waived if the beneficiary receives a tax-free scholarship, attends a U.S. military academy, or receives other tax-free educational assistance, such as a Pell Grant. In these instances, the earnings portion of the withdrawal remains subject to ordinary income tax. State tax implications on non-qualified withdrawals can vary, potentially imposing additional state-level income tax or penalties.

Alternative Qualified Uses for 529 Funds

The definition of “qualified education expenses” for 529 plans extends beyond traditional four-year college tuition, offering flexibility for various educational pursuits. Funds can be used for eligible expenses at trade and vocational schools, provided these institutions participate in federal financial aid programs. This includes costs such as tuition, fees, books, and supplies, allowing individuals to pursue skilled trades or technical careers.

Apprenticeship programs registered with the U.S. Department of Labor under the National Apprenticeship Act also qualify for 529 funds. Eligible expenses for these programs encompass tuition, fees, books, supplies, and even required equipment or tools. Additionally, 529 plans can cover up to $10,000 per beneficiary per year for tuition expenses at elementary or secondary public, private, or religious schools. As of July 4, 2025, this K-12 allowance is expanding to include other expenses like curriculum materials, books, tutoring, and testing fees.

Another qualified use for 529 funds is the repayment of qualified student loans. A lifetime limit of $10,000 per beneficiary applies to principal and interest payments on these loans. This $10,000 limit can also be applied to qualified student loans for each of the beneficiary’s siblings. Furthermore, certain courses required to obtain professional certifications or credentials may also qualify for 529 funds, broadening the scope of eligible educational expenses.

Changing the 529 Plan Beneficiary

Account owners can change the beneficiary of a 529 plan without incurring tax consequences or penalties. This option is useful if the original beneficiary does not pursue further education or if funds remain after their educational journey. The new individual designated as the beneficiary must be an “eligible family member” of the original beneficiary, as defined by IRS rules.

Eligible family members include:
The original beneficiary’s spouse, child, stepchild, foster child, adopted child, or descendants.
Siblings, stepsiblings, parents, stepparents, aunts, uncles, nieces, nephews, and first cousins.
Spouses of any of these individuals.

This allows funds to be transferred to another child, a grandchild, or even the account owner if they return to school, preserving the tax-advantaged nature of the savings.

Roth IRA Rollover Option and Other Considerations

The SECURE Act 2.0 allows for tax and penalty-free rollovers from 529 plans to Roth IRAs. This provision offers a valuable pathway for unused education savings to transition into retirement savings. Strict eligibility requirements must be met for this rollover: the 529 plan must have been open for at least 15 years, and the specific funds being rolled over must have been in the 529 account for at least five years.

The amount rolled over is subject to the annual Roth IRA contribution limits applicable to the beneficiary for that year, and there is a lifetime maximum rollover limit of $35,000 per beneficiary. The rollover must be directed to a Roth IRA established for the 529 plan beneficiary. This new option provides a flexible solution for families with residual 529 funds, enabling them to convert education savings into a retirement nest egg without tax penalties.

Alternatively, account owners can simply choose to leave the funds invested within the 529 plan. This allows the savings to continue growing tax-deferred, and there are no age limits on when 529 funds must be used. The original beneficiary might decide to pursue education later in life, or the funds could be designated for their future children by changing the beneficiary at an appropriate time.