If you'd like to put money aside for your child's academic future, a 529 plan can be a valuable resource. However, those funds may seem essentially locked up for education-related expenses.
What happens if you don't use your 529 plan, though? You have more options than you might think.
What is a 529 plan?
A 529 plan, or
Whatever money you put into a 529 savings plan grows tax-deferred, meaning you won't owe federal income tax on any interest or returns your contributions earn each year. Distributions also do not incur federal income tax as long as the money goes toward
Contribution limits, investment options and state income tax deductions for contributions vary by state, so compare 529 plan options up front. Many states also offer tax-deferred growth and tax-free distributions as plan benefits to encourage
How can you make the most of an unused 529 plan?
After you've designated a child as the beneficiary of a 529 plan, there's still a chance they won't end up needing it. This could happen for many reasons, including earning scholarships, a serious illness or a lack of interest in higher education.
These plans do restrict how their funds can be used, but federal law offers alternatives for accessing money in a 529 plan without taxes or penalties. Note that state tax laws can differ from federal law, so be sure you understand how your state will handle tax distributions before making any of the moves below.
Secure Act 2.0 allows 529 transfers to a Roth IRA
- The 529 beneficiary must be the IRA owner and will have to have earned income.
- Rollovers will be subject to the annual Roth IRA limits in the year they are rolled, less any contributions you've previously made for the year (for example, 2023 limits are $6,500 under age 50; $7,500 age 50 or older).
- 529 must be at least 15 years old.
- Any contributions or earnings from the past five years are not eligible to be rolled into the Roth IRA.
- The lifetime maximum of funds rolled over is $35,000.
Change the beneficiary
Federal tax code allows 529 account holders to
- Sibling or stepsibling
- Parent or stepparent
- Nephew or niece
- Aunt or uncle
- First cousin
The spouse of any of these relatives may qualify as well.
Pursue a different type of education
While many people think of 529 plans as a tool to save for college, the law doesn't ask you to use the money for a traditional four-year college or university. Rather, it requires you to put the money toward an
Other available options for your 529 funds include:
K-12 tuition expenses, up to a $10,000 limit.
- Vocational schools.
- International schools.
Apprenticeship programsregistered with the U.S. Department of Labor.
- Wilderness first aid course or the Outward Bound program.
Repay student loans
Another way to avoid federal taxes and penalties on 529 plan distributions is by
Since you can change a 529 plan's designated beneficiary, it's even possible to make yourself the beneficiary and use up to $10,000 in plan distributions to
Take nonqualified withdrawals
What happens if you don't use your 529 plan for any educational purpose at all? Well, you wouldn't forfeit your savings or be stuck with an account balance you can't touch. You'd simply pay taxes and penalties on your withdrawals.
On your federal tax return, this means you will include the earnings that are distributed as ordinary income and would owe a 10% penalty on any investment returns your contributions have generated. In other words, you'd essentially lose the tax-deferred growth benefit the account provided. This penalty doesn't apply, however, if you
- Earned a scholarship or grant.
- Enrolled in a military academy.
- Became disabled or died.
- Received funds from an employer for their educational expenses.
In cases like these, you may not
Don't rush your decision
Saving for college using a 529 plan is a tax-efficient financial strategy that can help you accumulate wealth for a loved one. When it's time to distribute those assets, you want to ensure they have a meaningful impact on your family member's future. If that impact isn't related to higher education, that's okay. You can adapt and adjust.
The good news is you don't have to rush to make a decision. Unlike other savings vehicles—such as traditional IRA, 401(k) or 403(b)—you don't have to
If you don't need the account balance for a near-term purpose, you can leave it untouched in case a relative needs it for graduate school or your spouse decides to pursue an MBA. You can continue investing in your 529 for years, preserving the account's tax benefits.