We thank Herman Davis, Regional Vice President for Liberty Bank, for sharing content from The Liberty Line, a publication of Liberty Bank.
It’s a question that bothers many parents who have opened 529 college savings funds for their kids, or are considering doing so: What happens to my money if my child doesn’t go to college? Fortunately, 529 funds aren’t a “use-it-or-lose-it” proposition. Even if your child decides not to attend college, you have more options for your 529 savings funds than you might expect.
Benefits of a 529 Savings Fund
A 529 fund is a tax-advantaged account you can establish to invest money for your child’s (or other relative’s) college education. You can open 529 accounts at many banks and investment firms, and have numerous options for investing your money.
Some states offer state tax deductions for 529 account deposits. And in most cases, you won’t owe state taxes on your account withdrawals and investment earnings, either. However, the main benefit of such plans is that withdrawals and earnings are exempt from federal taxes — so long as the money is used to pay for what the IRS considers “qualified” college expenses.
“Qualified” college expenses typically include tuition, mandatory fees, books, supplies, computers, and room and board up to the amount the college lists in its “cost of attendance” list.
5 Other Ways to Use 529 Savings Funds
If you’re worried that your child may follow a path that doesn’t include college, here are several options for the money in your 529 account:
1. Let another college-bound relative use it. This entails changing your plan’s beneficiary — the person who will use the money to pay education expenses — to another family member. This could be another child (such as your niece or grandson) or a close adult relative, or his or her spouse (such as your sister or brother-in-law).
2. Use the money yourself. Have you or your spouse considered returning to college or getting an advanced degree? If you name yourself or your spouse as the new 529 fund beneficiary, you can use the money for qualified higher-education expenses.
3. Be patient. Your child may still decide to go to college after first spending some time in the workforce. Unless your plan restricts how long the account may remain open, you typically can leave the funds invested for years. They’ll be ready to use if your child has a change of heart later on.
4. Think outside the box. Higher education includes more than traditional colleges and universities. Your child can also use 529 funds to pay for technical and other qualifying professional schools — as long as the institution participates in financial aid programs sponsored by the U.S. Department of Education. You may be surprised to learn that professional golf academies and other unusual programs sometimes qualify!
5. Withdraw the money — at a price. You’re always allowed to take out the money and close your 529 account. The catch is that you’ll pay federal and state taxes on any account contributions, plus a 10% tax penalty on any earnings. (The penalty is for not using the money for higher education.)
If withdrawal is your only viable option, consider removing the money in a year when you’re in a lower tax bracket (such as during retirement). In the unfortunate event that your beneficiary dies or becomes disabled and can’t use the funds for college, you can withdraw the money without paying the extra 10% penalty. However, you’ll still owe taxes on contributions and earnings.
As you can see, 529 plan account holders never “lose” money because their child decides against college. Ask your banker or a college financial aid representative if you have more questions about 529 college savings funds.
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