What to Do With a 529 Plan if There’s No College?

A 529 plan is a tax-advantaged savings account designed for future education costs. Contributions are made with post-tax money, which grows federally tax-deferred, and withdrawals for qualified education expenses are tax-free. If the intended beneficiary decides against pursuing a traditional college degree, the funds are not lost, as several flexible options are available to the account owner.

Changing the Plan Beneficiary

One of the most direct solutions for unused 529 plan funds is to change the beneficiary. This process is straightforward and avoids taxes or penalties if the new beneficiary is a qualified family member of the original one. The account owner can initiate this change at any time by completing a form provided by the 529 plan administrator.

The Internal Revenue Service (IRS) defines a qualified family member broadly, including the beneficiary’s:

• Spouse
• Children or stepchildren
• Siblings or step-siblings
• Parents or stepparents
• Nieces or nephews
• Aunts or uncles
• First cousins
• In-laws, including son, daughter, father, mother, brother, or sister-in-law

The account owner can also name themselves as the new beneficiary if they plan to return to school.

Transferring the account to a new, eligible family member is not a taxable event. The account’s earnings continue to grow tax-deferred, and withdrawals for the new beneficiary’s qualified education expenses remain tax-free. This option preserves the tax advantages of the 529 plan.

Using Funds for Other Qualified Expenses

The definition of “qualified education expenses” has expanded, offering more flexibility for 529 plan funds beyond a traditional college degree. These funds can be applied to a variety of educational paths, and withdrawals for these purposes are penalty-free and tax-free.

A provision allows up to $10,000 per beneficiary, per year, to be used for tuition at public, private, or religious K-12 institutions. This offers a way to fund a child’s primary education if the savings are no longer needed for higher education.

The scope of qualified expenses includes certain apprenticeship programs registered with the U.S. Secretary of Labor. Funds can cover expenses such as fees, books, supplies, and required equipment. This option supports beneficiaries who choose to enter a skilled trade through hands-on training.

A lifetime limit of $10,000 per individual can be used to repay qualified student loans for either the beneficiary or their siblings. If you use tax-free 529 earnings to pay student loan interest, you cannot also claim the student loan interest deduction for that same amount on your federal income taxes.

Converting 529 Funds to a Roth IRA

An option introduced by the SECURE 2.0 Act allows for the tax-free conversion of unused 529 plan funds into a Roth IRA for the beneficiary. This provision offers a way to pivot from education to retirement savings, but it is subject to specific requirements.

To be eligible, the 529 account must have been open for at least 15 years. Additionally, any contributions and their associated earnings being moved must have been in the 529 account for at least five years.

Rollovers are subject to annual Roth IRA contribution limits ($7,000 for 2025) and a lifetime maximum of $35,000 per beneficiary. The rollover must be made to a Roth IRA in the beneficiary’s name. The beneficiary must also have earned income at least equal to the amount being rolled over for that year.

Making a Non-Qualified Withdrawal

If other options are not suitable, the account owner can withdraw the funds for a non-qualified purpose. The withdrawal is divided into two parts: the original contributions and the investment earnings. Your contributions are returned to you free of federal tax and penalty, as they were made with after-tax dollars.

The earnings portion of a non-qualified withdrawal is subject to ordinary income tax at the recipient’s marginal tax rate. A 10% federal penalty is also levied on the earnings. For example, if you withdraw $10,000 where $3,000 is earnings, only the $3,000 is subject to income tax and a $300 penalty.

In specific situations, the 10% penalty is waived, although income tax on the earnings is still due. These exceptions include the death or disability of the beneficiary. An exception is if the beneficiary receives a tax-free scholarship, allowing a penalty-free withdrawal up to the scholarship amount. The penalty is also waived for withdrawals up to the cost of attendance at a U.S. military academy.