Your Child Skipped College: What To Do With Your 529 Plan?

Many parents have opened 529 plans to help save for the high cost of a college education for their children. But what if your child graduates high school, and decides not to go to college? Typically, if you pull funds from a 529 plan for non-educational expenses, you will pay taxes plus a 10% penalty on the money. So how should you handle these plans in this situation in order to maximize their value, and minimize your tax burden?

Keep in mind that we are not tax advisors; however, we found this US News article with some helpful tips that we wanted to share with you to help explain your options. (You should consult with a qualified tax attorney before taking any of these actions.)

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1. Wait before withdrawing funds. Sometimes students will take a “gap year” – that is, complete high school and take a year off before starting college. Even if this is not your student’s intent, he or she may change their mind in a year or so. If you don’t absolutely need the money for something else right away, give it some time – at least a couple of years – before you withdraw the money. It is quite possible that your child may decide to attend college after all once they mature a bit.

2. Transfer ownership. If you planned on gifting the money to the child anyway, why not transfer the ownership of the plan to them? That way they can take it out and use it as they need to, and they will pay the taxes and penalties out of the balance when they do so.

3. Keep the plan for future grandchildren. If you are expecting a grandchild, you may choose to keep the 529 plan in place, and change the beneficiary to the grandchild’s name. Typically this way the money will have a lot more time to grow, and even if you stop contributing, you may have a nice sum saved up to help with educational expenses once they are old enough for college.

4. Use the money for your own education. If a parent is planning on returning to school, or even taking some continuing education or licensing classes, you may be able to change the beneficiary to yourself or your spouse, and use the money tax-free this way for yourself.

College savings
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5. Keep it as an emergency fund and use only when absolutely needed. While a 529 plan is typically invested in the market, and may not be the safest place for your emergency cash, if you already have this type of plan in place and don’t wish to pay taxes on it right away, you may wish to just hold onto it for the time being. Since you will only pay taxes on the money when it is withdrawn, the account can continue to accrue interest in the meantime, and you may be able to take some of it out gradually only when needed, and thus spread out the tax penalty.

As college planners, we don’t always recommend starting 529 plans for college expenses – partly because of this very issue, plus the fact that the money is subject to market fluctuations. But if you have one of these plans already, the options above may give you some alternatives to consider (again, be sure to consult a CPA for the potential tax consequences in your particular situation).

And if you haven’t yet started a 529 Plan, but would like some ideas for how to safely save money for your children’s education, please contact us today at 614-536-0246 to schedule a FREE consultation with a college planning specialist.

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