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What Happens to a 529 Plan If Your Child Doesn’t Go to College

After hearing all the benefits of college savings, the most common question we hear from parents is:

“But what happens with my 529 plan if my child doesn’t go to college?”

Great question!

Parents often mistakenly think their money will just “disappear” or will be difficult to reclaim if their child decides to become a dancer, sportsman, or a millennial Instagram influencer instead of going to college.

We want to clear this up–this is wrong! Your money will not disappear. Your money is always yours and is always accessible.

Let’s assume that your child decides that he or she wants to become the next Kylie Jenner and Instagram their way to fame and fortune rather than go to UCLA to study chemical engineering.

What are your options?

Option 1: You can change the beneficiary at any time.

Yes, that’s right! Say goodbye to your Instagram model child and easily allocate the money to your runner-up child! If your child decides not to pursue higher education, you can simply change the beneficiary (without incurring any tax penalties) to another child, grandchild, or even to yourself.

The only circumstance where there would be federal taxes charged is if a grandparent were the owner of a 529 plan account. This is because there would be a tax owed, known as the “generation-skipping” tax, after death as part of estate taxation. However, this is almost always an edge case since it only applies to those with estates over $5mn.

Option 2: You can wait for your child to change his mind

Wait them out! If the leading role in the new Fast & Furious franchise hasn’t panned out for them yet, they may begin looking back at university. You can keep the money in the 529 account in the case your kid decides to pursue college or a graduate degree in the future. There is no requirement to withdraw funds at the age of 18–the money can remain in the plan indefinitely as long as there is a living beneficiary.

Option 3: You can spend your “college savings” not only on tuition but many other things.

Proceeds from the college savings plan can be spent on a variety of educational expenses including books, equipment, room and board, and even schools K-12. Based on the new bill that passed, you can now pull out the $10,000 each year to use for elementary and secondary school, until a child starts college.

Option 4: You can take the money out!

Yes, that’s correct–if your child decides to not attend college, and you don’t have another child and don’t want to wait to see if she changes her mind, then the money is yours–it’s as simple as that.

You can still take the money out, and similar to retirement accounts foregoing the tax benefits, only the additional earnings will be subject to 10% penalty. This doesn’t affect the amount of your original contributions. The tax penalty is there to dissuade people from trying to use the 529 plan to avoid taxes rather than its intended purpose–education.

Example: Over the years you’ve deposited $10K and earned $2K. Even with 10% penalty, you’re still better off by $800 compared to keeping the money in your checking account!

Having covered the eventualities of what happens if you start a 529 and your child doesn’t go to college, a better question might be:

“What happens if I don’t create a college savings plan?”

It’s worth noting that the act of saving, in and of itself, vastly increases the chances of your kid going to college by seven times! If you’re serious about wanting your child to go to college, that should be impetus enough to start saving.

But let’s talk about the bigger picture for a moment. Eighteen years from now, tuition at every single college is set to double. A four-year education at a top private college, like Yale, is projected to cost $490,000 in 2036, compared with $291,000 now.

If you don’t start preparing early for your child’s future, you may face a pretty steep reality. You may be forced to take out expensive student loans (with 8% annual interest–ouch!) or credit cards, borrow against your house, delay your retirement or, worst of all, tell your child they can’t go to college because you can’t afford it.

This isn’t meant to be scare-mongering–it’s the stark reality of not preparing. We don’t want you to be in that place 10, 15 or even 18 years from now. If you start now, you will reap the rewards later and get peace of mind about your child’s future.

Final Thoughts

So, now you are armed with these three pieces of knowledge:

  1. Your saved college money is yours under all eventualities.
  2. The cost of college is skyrocketing.
  3. A good saving plan starting now has the ability to cover those price hikes even with a modest monthly contribution.

It is clear that there has never been a better time to start using an app like U-Nest to quickly get you set up and on track. U-Nest can help you enroll in the best 529 for you in under ten minutes from now when you download it HERE.


This material is for informational purposes only and should not be construed as financial, legal, or tax advice. You should consult your own financial, legal, and tax advisors before engaging in any transaction. Information, including hypothetical projections of finances, may not take into account taxes, commissions, or other factors which may significantly affect potential outcomes. This material should not be considered an offer or recommendation to buy or sell a security. While information and sources are believed to be accurate, UNest does not guarantee the accuracy or completeness of any information or source provided herein and is under no obligation to update this information.