A 529 savings plan is a fantastic tax-advantaged option if you’re currently focused on building college savings for your child. But what happens if your child decides against pursuing the traditional college degree you imagined for them?
Thankfully, 529 plans are more flexible than you might think. Yes, they’re best suited for traditional education funding, but there are also other options available as far as what you can do with yours. It’s also possible to take advantage of them without facing sky-high penalties.
Let’s take a closer look at some of the best 529 options to consider if your kid decides college is a no-go after all. We’ll cover the basics of understanding college funds like 529 plans, as well.
Transferring the Account to Another Beneficiary
One of the more tax-efficient ways to repurpose 529 college savings is to simply transfer them to another member of your family. The IRS permits this without the need to pay additional taxes or penalties if the account goes to an eligible relative.
Who is an eligible beneficiary?
If your child isn’t going to use the funds to continue their education, you can choose to transfer it to any of the following people:
- A sibling (including a step-sibling)
- A grandchild
- A cousin
- A parent or other legal guardian
- Yourself (for the purposes of continuing your own education)
Transferring the account in this way allows account holders to sidestep the usual penalty that applies to non-qualified withdrawals. It’s an especially good option to consider if you have more than one child, as the funds still technically apply to their original purpose – helping your offspring build a firm foundation in life via continuing education.
Withdrawing Money for Non-Educational Purposes
Interested in ways to withdraw 529 plans for purposes that don’t have anything to do with education? It’s important to fully understand the associated tax factors and other financial implications associated with doing so first. Here’s a closer look at how that works.
What are the tax implications of non-qualified 529 withdrawals?
If you do decide to withdraw 529 plans for non-educational purposes, you’ll likely incur a 10 percent tax penalty on the earnings portion of those funds. (Federal and sometimes state taxes apply.) However, you can withdraw what you originally contributed tax-free, as you’ve already paid your taxes on those funds.
There are exceptions to the standard 10 percent IRS penalty, though. Are you withdrawing the funds because your original beneficiary became disabled? Maybe they received a scholarship toward their education or decided to enlist in the military instead. If so, you may be able to access your funds penalty-free.
However, while it’s good to know that non-qualified withdrawals are an option if needed, they’re best considered when alternatives just don’t make sense for whatever reason.
Alternative Uses for 529 Funds
Your child doesn’t necessarily have to enroll in a traditional four-year university to use the college savings in a 529 account. Many people are surprised to learn they can be applied to other educational opportunities, as well, including trade schools and professional certifications.
Vocational schools
Many accredited vocational options are eligible for 529 plan coverage. Examples include but aren’t necessarily limited to cosmetology, the culinary arts, the automotive industry, and welding. Be sure to confirm that the option your child is interested in qualifies before moving forward.
Professional apprenticeships
Is your 529 beneficiary considering an apprenticeship instead of traditional schooling? Have them prioritize programs that are officially registered with the United States Department of Labor, as they’re eligible for coverage.
K-12 school tuition
Although you’ll need to confirm that this option is available in your state, it’s sometimes possible to apply 529 funds to up to $10,000 a year in private school tuition. Both elementary and secondary schools potentially qualify.
School loan repayment
Is your beneficiary or one of their siblings currently paying off existing student loans? The SECURE Act makes it possible to use up to $10,000 from 529 funds to cover part of that obligation.
Rolling Over a 529 Plan into a Roth IRA
As of 2024, the SECURE Act 2.0 makes it possible to repurpose unused funds in a 529 account by rolling them into a Roth IRA. This is possible for amounts up to $35,000 for the same beneficiary who would have received the original 529 funds. However, certain criteria must be met first:
- The 529 plan in question needs to be a minimum of 15 years old.
- The applicable yearly amount cannot exceed Roth IRA contribution limits. At present, this limit is $7,000 for people under the age of 50.
- The contributions rolling over must have been made over five years ago.
This option is a terrific one for families interested in redirecting 529 funds toward the same child’s long-term financial stability and retirement. It’s also naturally preferable to alternatives that trigger tax penalties.
Maximizing the Benefits of Your Existing Investments
If you’ve been sleeping on the idea of 529 plans because you’re worried about limitations on fund usage if your child doesn’t go to college, don’t be. Sometimes life has a way of not going as planned, but there are always viable options available regardless.
So whether you wind up using the funds as planned, transferring them to another beneficiary, or something else entirely, it’s worth considering 529s as part of your ongoing approach to financial planning. But know that you don’t have to figure things out alone.
Don’t navigate complex situations alone. Schedule a financial consultation with MyStages® today to get personalized guidance tailored to your unique circumstances.
