What to Do With a 529 Plan If Your Kid Doesn't Go to College

You can use money in a 529 at any institution of higher education that receives financial aid. That includes community colleges; technical, art, or music schools; vocational and certificate programs; trade schools; and continuing education courses. For more details on researching qualifying schools and programs, you can start here.

The money can also be applied to costs for study-abroad programs. There are about 400 colleges in other countries that are eligible to use 529 money, Kantrowitz says.  

The only caveat is that you must spend 529 savings on qualified expenses. That includes tuition, fees, books, supplies, and computers, as well as room and board for students in school at least half-time. But it won’t cover costs like college application fees, personal living expenses, or transportation. 

Most 529s plans allow you to change the beneficiary once a year. So if your child won’t be using the money, you can transfer the assets penalty-free to eligible family members, such as the account owner (typically a parent or grandparent) or a close family member.

The list of eligible family members is extensive—it could be a sibling, aunt, uncle, niece or nephew, step-sibling, parent, step-parent, spouses of all those individuals, or a first cousin.

What if your child has a change of heart? You can always convert the 529 account back to the original beneficiary.  

If your child has a documented physical or emotional disability, you can tap a 529 to pay for some types of support. The money can cover services that enable him or her to attend a post-secondary school. If the disability prevents the student from attending school, you can withdraw the money without penalty, though you will still have to pay income taxes on the earnings.

You can also roll over assets from a 529 plan to an ABLE (Achieving a Better Life Experience) account—a savings vehicle for people with disabilities—without a penalty. But the ABLE account and 529 account must be for the same beneficiary or another member of your family who has special needs.

For those with kids attending nonpublic elementary or secondary schools, federal tax rules allow another option for 529 money. You can withdraw up to $10,000 without paying federal income taxes to cover tuition at private or religious elementary and secondary schools. (Check your state’s rules first, because some don’t consider private-school tuition to be a qualifying expense.)

But unless you have additional savings tucked away, be cautious about using 529 money before your child reaches college. “By giving the assets a longer window of opportunity to grow, the more potential tax-free growth you may have in the plan,” says Faron Daugs, a certified financial planner in Libertyville, Ill.

For those who are on track to afford college, however, the option to use 529 savings to pay K through 12 expenses can make sense, says Tom Fredrickson, a certified financial planner in Brooklyn, N.Y.

“This is especially true if the alternative is using money that would have to be taxed, such as investments with capital gains or money in retirement accounts,” Fredrickson says.

If all else fails, you can just withdraw the money—and that may not cost you as much in taxes as you might think. The withdrawal amount will be taxed at the beneficiary’s rate, which is likely to be lower if it’s your child. You’ll pay a 10 percent penalty, but it’s just on earnings growth, not the whole value of the account.

There are a few situations where you may not incur a penalty at all. If the beneficiary dies or becomes disabled, or if he or she goes to a U.S. military academy, no penalty applies. And if your child gets a scholarship, you can withdraw up to the amount of the award and spend it on whatever you want. But you’ll pay income tax on any gains in the account when you make withdrawals.