How to Spend Your 529 Plan If Your Child Does Not Go to College

Disclosure: This article is written for informational purposes only and should not be construed as financial or any other type of professional advice.

Money inside a 529 Plan is a godsend for parents footing their children’s college tuition bills, except when it isn’t. What happens if a child (the plan beneficiary) decides not to attend a four-year college after high school?

When money in 529 College Savings Plan funds is spent on non-qualified expenses (that is, not on college tuition and related expenses for the beneficiary), account owners pay ordinary income taxes and a 10% additional tax penalty on earnings.

I saved in another type of college-savings account (Coverdell ESA), which had similar education-related restrictions. Naturally, I wanted to avoid paying taxes and penalties if legally possible. There are ways to use money in a 529 Plan if a child doesn’t go to college after high school. For example, I could:

Send myself to college or graduate school.

If my child decides not to attend college, I can spend the money on my own education. I’d name myself as the beneficiary. Then, I could pursue a graduate degree using 529 funds.

Pay for tuition and expenses at a technical or vocational school.

A student doesn’t have to attend a traditional university to spend down 529 Plan funds. Expenses at technical and vocational schools as well as community colleges may be eligible for tax-free withdrawal from a 529 Plan. has a lookup tool to determine a school’s 529 eligibility.

Send another child (or family member) to college.

I could change the beneficiary of the 529 Plan to another child or family member. The IRS does not limit its definition to immediate family. A family member can be:

  • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them
  • Brother, sister, stepbrother, or stepsister
  • Father or mother or ancestor of either
  • Stepfather or stepmother
  • Son or daughter of a brother or sister
  • Brother or sister of father or mother
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law
  • The spouse of any individual listed above
  • First cousin

So, if I felt generous, I could fund the education of an in-law, nephew, or first cousin by changing the 529 Plan beneficiary.

Pay for elementary or secondary school.

Recent legislation allows the use of 529 plan funds for school tuition prior to college.

Rollover funds to an ABLE account.

Another change in the tax law now allows account owners to move money from 529 plans to ABLE accounts for beneficiaries with disabilities. Through these accounts, families can set aside and invest funds for costs associated with the disabilities without affecting disability benefits from Medicaid or Supplement Social Security Income (SSI).

Wait a while.

Just because a child doesn’t go straight from high school to college doesn’t mean that he’ll never attend an institution of higher learning. He might want to work, travel to Europe or South America, hike the Appalachian Trail or Pacific Crest Trail, or pursue a career as an entrepreneur immediately after high school graduation.

After a few years or even longer, he may decide to earn a bachelor’s degree in order to build upon his real-life experience. Instead of telling him it’s too late, I’ll have cash on the ready to fund his college dreams.

Claim the money without 10% penalty under certain circumstances.

Let’s say my child decided to enter the military after high school and now plans to attend college using veterans’ benefits. He no longer needs all of the cash set aside in a 529 Plan. I may be able to take a plan distribution up to the amount of educational assistance he receives without incurring the 10% penalty on earnings.

Similarly, those who receive employer-provided educational assistance may avoid tax penalties. Check with the IRS to learn about exceptions to the 10% additional tax.

Leave a legacy.

Let the money inside the 529 Plan sit there. When my children have children (possibly), I could name my grandchildren as beneficiaries. In this way, my children can focus on saving for retirement while my grandkids can avoid student loan debt.

Pay off your student loans.

Under the SECURE Act, account owners can use 529 plan funds to pay off a beneficiary’s student loans of up to $10,000 total without penalty or federal taxes. This amount is a lifetime maximum. Funds can also be applied to the student loans of each of the beneficiary’s siblings, again with the $ 10,000-lifetime maximum.

Now, if your child didn’t go to college, then it’s unlikely that they’ll have student loans.

But, it seems plausible that you could change the beneficiary to yourself and then use the 529 plan money to pay off any remaining loans that you may have.

Withdraw the money and pay the taxes.

If my child decides not to attend (or finish) college and I want to withdraw the money held in a 529 Plan, I can certainly access your funds. Typically, I’ll pay ordinary income taxes and a 10% penalty on earnings only.

I shouldn’t have to pay federal income taxes on the contributions or the principal portion of my investments when I take a distribution. However, if I received a state tax break when funding the 529 Plan account, I may owe state taxes on the principal portion of the distribution as well as earnings.

I managed to spend all the college savings I had on my oldest son, who graduated from college recently. And I should be able to spend the money set aside for my youngest. But even if they had decided not to go to college right after high school, I wouldn’t worry too much — especially when they are young. There are options to use this money. I’d consult with my tax accountant before making any moves. But I wouldn’t regret saving for one of life’s biggest expenses.

Note: New Tax legislation now allows 529 plan money to be spent for a new category of educational expenses. According to the IRS, starting in 2018, qualified expenses include up to $10,000 in annual expenses for tuition at an elementary or secondary school.

For details on 529 Plans, including types of plans (prepaid, savings), investment and administrative fees, perks of certain state plans, tax planning to maximize the use of 529 funds, and more, I recommend’s Complete Guide to 529 Plans. If you’d like to save for college without saving too much, check out my step-by-step guide and spreadsheet course.

How have you decided to save for college expenses and why?


23 responses to “How to Spend Your 529 Plan If Your Child Does Not Go to College

  1. If you’re only using 529 money to pay for college, you’ll be missing out on education tax credits. According to the Internal Revenue Service, the American opportunity tax credit provides dollar-for-dollar tax credit, which covers up to 100 percent of the first $2,000 you spend on college each year and up to 25 percent of the next $2,000.

  2. My father has set up a 529 account for each of my grandchildren. My latest granddaughter was just born, and has been diagnosed with Downs Syndrome.. I am asking that he not set up that kind of account for her, but open up an alternative account that might be more appropriate. Would you agree?

    1. Hi Diana,

      Congratulations on the birth of your granddaughter. I’m not qualified to give personalized advice, that should come from a professional who knows and understands all aspects of this situation.

      A few things to consider when contemplating saving for children:

      • There is more than one way to save — for example, there are special trusts for minors
      • The use of 529 Plans has been expanded recently, so it can cover tuition for private elementary schools
      • Children may or may not go to college; in some cases, planning for flexibility could be more useful than saving for a specific purpose like college.

      Just a note that Mitch Tuchman of Rebalance IRA (see sidebar) has personal experience in planning for a child with special needs.

      Hope this helps.


    2. Diana,
      There is a new kind of account called an ABLE account. Specifically created for situations like yours. Funds can grow tax free and be used to care for your daughter into adulthood. Contact your financial advisor.

    1. If your child goes into the military, the funds in the 529 plan could remain while he or she serves and then applied to educational expenses after the military service has ended or perhaps during service if he or she is able to attend school during this time. My understanding about the death of a child who has been designated as the beneficiary of a 529 plan is that the money can be withdrawn without incurring a penalty but taxes on earnings (not original contributions) will be owed on withdrawals.

  3. If a child does not spend all the money in the account, will they be taxed at normal income tax in their tax bracket?
    What type of proof does the child need to show that the money was used for school tuition and expenses?
    Is room and board considered an expense if they are living off campus?

    1. Hi David, it’s best to discuss your personal situation with a tax professional who’s familiar with your situation as well as federal and state tax law. To get you going, though, here are some things to know:

      The account owner/contributor/custodian (typically the parent but could be a grandparent or child/student) pays taxes on money unused in the 529 plan account, not the account beneficiary (typically the child/student); however, taxes and penalties are owed only when money is withdrawn and only on earnings, not the original principal. Taxes can be minimized or even avoided if you withdraw funds during a period of low income and/or if you change the beneficiary, perhaps to a grandchild or other relative. If you received a state tax credit for contributions, then you may owe taxes to pay back this credit. State tax law varies.

      The school should issue a 1098-T form for tuition paid to you or your student (and this info is made available to the IRS).

      Room and board is a qualifying expense, even if students are living off campus. This amount (the ceiling) is established by the college or university so some or all of what you pay for living expenses should be covered. You’ll need to keep receipts separately.

      Generally, you’ll want to match up the 529 withdrawals with the expenses each year. But, depending on your personal cash flow, you could pay college bills out of pocket and then reimburse yourself with the 529 funds.

      Here are some resources:

      Hope this helps. Thanks for reading!

    1. My understanding is that the 529 money can be used for an eligible educational institution only, so the school or college should be on the list of approved or eligible institutions: Here’s a link to a list of international schools: You may find this article from The Balance useful:

      Thanks for reading!

    1. Looking at this IRA publication

      If your child receives a tax-free educational assistance like a scholarship, then you won’t have to pay the 10% penalty on money withdrawn from the 529 plan. You’ll still pay ordinary income tax on earnings but should be able to withdraw contributions tax-free. It’s best to consult your tax advisor and provide her/him with information on contributions, earnings, and withdrawals to make sure.

  4. Our child did not need to tap the 529s we set aside nor will he be having children (long story). I am the principal owner of the account and turn 59.5 in about a year. I KNOW FOR A FACT that I can take distributions from a self-directed IRA (mostly real estate) so my next question is the logical alignment. If we simply wait until I am 59.5 or later, does that same exemption apply to the $150K that sits in the unused 529 account? We realize that we will have to pay taxes on the profit and have all statements from over 30 years of investing & the account has always been with the same out-of-state account manager. Since it is an out-of-state plan, we never were able to claim any State tax reductions

    1. I think you’re asking if the 10% penalty applies to the taxable portion (the gain) of the 529 withdrawal. My take is that the penalty would still apply even after you turn 59.5 at least in terms of federal tax law. I’m not familiar with all of the state laws but generally, as you reference, since you didn’t get a tax break with your contributions, you shouldn’t have to pay back tax breaks but pay on gains and any penalties that may apply. This would be a great question to ask your tax professional and also get guidance on managing taxes in retirement.

  5. Slightly different question but me and my wife separated and divorce eventually some time in the future. I’ve set up a 529 account for my kid where I am the only contributor. I’m wondering what will happen if his mom decided to take the money out when he’s let’s say 16. Is that possible at all?
    Most of the cases are discussed already If he decides not to go to college for some reason. Many thanks for the detailed responses.

    1. Hi Martin,

      I’m thinking that you’re the account owner for the 529 plan so my understanding is that you’d need to authorize any withdrawals, meaning the mom or another third party couldn’t take out money. However, the account ownership may get transferred at some point from dad to mom, so the mom would be the decision-maker in this situation. At this point, the new account owner could take out the money when your child is 16 or so.

      For the withdrawal to be tax-free, it would need to be a qualified withdrawal, meaning it would have to be for college or qualified purposes (which could be tuition for a private high school).

      A friend in a similar situation kept control of the 529 plan and maintained it for college purposes only.

      Technically, money can be withdrawn at any time for any purpose from a 529 Plan. Its tax-free status is preserved only when the withdrawals follow rules associated with qualified expenses.

      Hopefully, your accountant and attorney can advise you on the best way to deal with the plan and its funds.

      1. Thank you very much, Julie. That makes it perfectly clear. Yes, I’m the account owner and when and if I transfer the ownership I presume I will be aware of the outcomes.

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