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529 Accounts: What Happens When Your Child Doesn't Go to College?

Key Points
  • A 529 account can be used for other types of education besides college, including trade and vocational schools.

  • As the 529 account owner, you always have the right to change beneficiaries to another family member – or even yourself.

  • However, if you decide to use the money for something other than qualified education expenses, you will have to pay income taxes plus a 10% penalty on the earnings.

Dear Carrie,

We've been saving in a 529 account for years for our son's education, but it now looks like he won't be going to college. Are there other options for using this money? —A Reader

Dear Reader,

One of the great—and challenging—things about having kids is that they can surprise you at every turn. While you can save diligently for their education, you can't predict what their talents or interests will be. Trust me—as a mother of three, I know from experience!

I think many of us envision a four-year college for our kids, but that's only one of a myriad of choices, especially today. So does that mean a 529 account is no longer a good idea? Absolutely not. Because while a 529 is generally referred to as a college savings account, it probably should more accurately be called a post-secondary education savings account. That's because the good news is that a 529 can be used for other types of education besides college.

Where you can use 529 assets

Most people don't realize that 529 assets can be used at any eligible institution of higher education. That includes not only four-year colleges and universities, but also qualifying two-year associate degree programs, trade schools and vocational schools—both at home and abroad. This means that whether your child wants to be a computer expert or cosmetologist, an artist or an electrician—and chooses to pursue post-secondary training in his or her chosen field—there's a good chance you can pay for that training with your 529 assets.

If your son has another type of school in mind, find out if it qualifies for 529 assets. Generally speaking, to qualify, a school must be eligible to participate in student aid programs offered by the Department of Education. Savingforcollege.com has an easy online tool for determining if a particular school qualifies. You just need to take the time to do a little research—or better yet, have your son do it.

If post-secondary education isn't in the cards

Even if your son's path doesn't include any type of post-secondary education, you still have options. You opened the 529 for the benefit of your son, but the account belongs to you and you have the right to change the beneficiary.

As long as the new beneficiary is a family member—a sibling, first cousin, grandparent, aunt, uncle or even yourself—the money can be used for qualified education expenses without incurring income taxes or penalties. Qualified expenses include tuition, required fees, books, supplies, computer-related expenses, even room and board for someone who is at least a half-time student.

Most 529 plans allow you to change the beneficiary once a year, so that leaves the door wide open for future use. You could even convert it back to your son's benefit should his plans change.

This flexibility gives you a lot of options. Let's say you decide to go back to school. You make yourself the beneficiary and use 50% of the 529 assets for your studies. What do you do with the balance? You could simply change the beneficiary to another member of your family who could use it for their own qualified education expenses.

The problem with taking the cash

Taking the cash is always a possibility, but it will cost you. If assets in a 529 are used for something other than qualified education expenses, you'll have to pay both federal income taxes and a 10% penalty on the earnings. (An interesting side note is that if the beneficiary gets a full scholarship to college, the penalty for taking the cash is waived.)

Since one of the main benefits of a 529 account is the federally tax-free earnings, I'd think carefully before cashing it out. And really, it might be wise to sit tight before making any decisions. Your son may surprise you again by going in a whole new direction and you'll be glad you've kept those 529 assets in reserve.

Have a personal finance question? Email us at askcarrie@schwab.com. Carrie cannot respond to questions directly, but your topic may be considered for a future article. For Schwab account questions and general inquiries, contact Schwab.

Next Steps

Looking Ahead: The Role of Market and Inflation Projections in Your Financial Plan
Is the Bond Market in a Bubble?

Important Disclosures

Before opening and investing in a 529 plan, carefully consider the information contained in the 529’s official statement, including investment objectives, risks, charges, and expenses. You can request an official statement from the specific plan sponsor. Please read it carefully before investing.

(0817-7XVC)

 

The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. 

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