A 529 plan is a tax-advantaged college savings plan that allows families to save for their children’s future education costs. Money that is deposited into the plan is invested and grows tax-free. With the rising cost of college education, starting to save early may be a key component to make college affordable for many families in the United States.
Many parents envision their children attending a four-year university. While you can diligently plan and save for them to go to college, you can’t predict what their wishes, interests or goals will be once they graduate high school. This leaves families with the questions of what happens to a 529 plan if your child decides not to go to college, gets a full scholarship or opts for alternative higher education such as a trade school or community college.
What happens to a 529 plan if your child doesn’t go to college?
Traditionally, 529 plan assets can be used for post-secondary education. This of course includes four-year colleges and universities, but also qualifying two-year associate degree programs and trade schools. 529 plan assets can also be used at qualifying schools in the United States and abroad. However, the recent tax law expands on the benefits of 529 plans. Owners of plans are now able to withdraw up to $10,000 per year tax free on private elementary school and secondary school expenses, including tuition and books.
How do I know if my child’s choice school qualifies for 529 assets?
Typically, if a school is eligible to participate in student aid programs for the Department of Education, then you can use 529 plan assets to pay for tuition there. Savingforcollege.com has an easy to use online tool you can use to see if your institution is 529 eligible.
What if my child opts out of post-secondary education all together?
If your child chooses not to attend post-secondary education, and you have not used the funds for elementary or secondary school expenses, you still have options. If you opened the account for a specific child, the account belongs to you and you have the right to change the beneficiary. The new beneficiary must be a family member, or it can even be yourself. Most plans allow you to change the beneficiary once a year, so you can even convert it back to your child if their plans change.
You can also use the assets of a 529 plan for something other then qualified education expenses, but not without penalty. You will have to pay federal income taxes on the gain and a 10% penalty on the earnings.
What happens if my child attends post-secondary education, but has a scholarship?
529 plan assets can be used on more than tuition. Qualified expenses include tuition, required books, fees, supplies, computer-related expense, and room and board for a student who is at school at least half-time.
Furthermore, scholarships provide an exception to the 10% penalty rule. If your child has a scholarship, non-qualified withdrawals up to the amount of the tax-free scholarship can be taken out penalty-free. However, you will still have to pay income tax on the earnings. This is essentially turnings your tax-free investment into a tax-deferred investment.
529 plans are a great tool to save for post-secondary education related expense. If you have any questions about 529 plans, drop me a note below!
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