What Happens to a 529 Plan if My Child Doesn’t Go to College?

At a Glance: Your Options for Unused 529 Funds

• Change the beneficiary to another family member at any time
• Use for K-12 tuition (up to $10,000 per year, federal limit)
• Pay for trade schools and apprenticeships at eligible institutions
• Pay off student loans (up to $10,000 lifetime limit per beneficiary)
• Roll over to a Roth IRA (up to $35,000 lifetime, with conditions)
• Keep the account and let it grow for future use

If you’ve researched how to pay for college, you’ve likely heard of a 529 plan. A 529 college savings plan is a tax-advantaged investment account that helps families save for college expenses. Your earnings grow tax-deferred, and you can withdraw those funds tax-free when used for qualified education expenses.

One of the most common concerns is: What if my child doesn’t go to college? The good news is there are numerous ways to use your investment, even if your child doesn’t attend a traditional 4-year college.

Options for Unused 529 Plan Funds

Change Your 529 Beneficiary to Another Family Member

When you open a 529 plan, you designate a beneficiary—the person whose education you’re investing for. The account owner can change the beneficiary at any time.

If your child doesn’t pursue higher education or receives a substantial scholarship, you can easily change the beneficiary to another family member—younger children, yourself, a spouse, or even a future grandchild. You can also leave the account as is and let it grow for future use.

Important: There is no age limit or deadline for using 529 funds. You can keep the account indefinitely, allowing it to grow for future generations.

Requirements for 529 Beneficiaries

• Must be a US citizen or resident
• Must have a Social Security number or federal tax identification number
• Must be the person whose education the account will fund

Use 529 Funds for K-12 Education

529 plan funds can also cover K-12 education expenses. You can use up to $10,000 per year (federal limit) for K-12 tuition only—books, supplies, computers, and room and board don’t qualify.

State Tax Note: While federal law allows $10,000 annually for K-12 tuition, state tax treatment varies. Some states may recapture tax benefits or not conform to federal rules. Check your state’s 529 plan for specific guidance.

Pay for Trade Schools, Career Training, and Apprenticeship Programs

If your beneficiary chooses not to attend traditional college, you can use 529 funds for trade schools, career training, and apprenticeship programs.

Eligibility: The institution must participate in federal student aid programs (Title IV) or be registered with the Department of Labor.

Qualified expenses include: tuition and fees, textbooks, supplies and equipment (including tools), special needs expenses, computers and internet access, and room and board (if enrolled at least half-time).

Roll Over 529 Funds to a Roth IRA for Retirement Savings

Thanks to the SECURE 2.0 Act, you can make tax- and penalty-free rollovers to a Roth IRA, giving your beneficiary’s retirement savings an incredible head start.

Conditions and Limits

• 15-year account requirement: The 529 must have been open for at least 15 years
• Five-year rule: Contributions made within the last five years aren’t eligible
• Annual limits: Subject to Roth IRA contribution limits ($7,000 in 2024; $8,000 for 50+)
• Lifetime limit: $35,000 per beneficiary
• Beneficiary requirement: The Roth IRA must be in the beneficiary’s name

Use 529 Funds to Pay Off Student Loans

Thanks to the SECURE Act, you can use up to $10,000 (lifetime limit per beneficiary) to pay off student loans—both federal and private.

You can change the beneficiary multiple times to help pay off student loan debt for different family members, providing flexibility when plans change.

Non-Qualified Withdrawals: Tax and Penalty Information

You can always withdraw 529 funds, but withdrawals for non-educational purposes should be a last resort. Non-qualified withdrawals are subject to income tax plus a 10 percent federal penalty on the earnings portion only—your contributions are never taxed or penalized.

Example: Calculating the Penalty

If you withdraw $8,000 but only have $7,000 in qualified expenses, you have $1,000 in non-qualified expenses. If your earnings portion was $1,000, use this formula:

Non-Taxable = (Qualified Expenses / Total Distribution) × Earnings

($7,000 / $8,000) × $1,000 = $875 non-taxable
Remaining $125 is subject to income tax and 10% penalty.

State Tax Considerations

You’ll also pay state income tax on earnings, and some states (like California with 2.5%) have additional penalties. Many states recapture tax deductions originally claimed for contributions.

Financial Aid Considerations

Parent-owned 529 accounts are assessed at only 5.64% on the FAFSA, compared to 20% for student-owned assets. This means minimal impact on financial aid eligibility.

Myth debunked: You don’t lose all your money if your child doesn’t attend college. You have multiple options for using funds, and your contributions always remain yours.

Action Steps: What To Do Now

1. Review your situation: Determine which option best fits your family’s needs
2. Check state rules: Visit your state’s 529 plan website for tax implications
3. Verify eligibility: Confirm institutions qualify for 529 funds
4. Consult a tax advisor: Get personalized guidance on your situation
5. Monitor account growth: Review your investment allocation periodically

Conclusion: You Have Options

Even if your child doesn’t attend traditional college, you have multiple ways to avoid penalties and continue benefiting from tax-advantaged 529 plans. You can fund vocational school, support retirement savings through Roth IRA rollovers, help siblings with college or K-12 tuition, or pay off student loans.

The key takeaway: a 529 plan is not all-or-nothing. With numerous flexible options, you can make the right decision for your family while maintaining significant tax benefits.