Susan E. Thomas CPA
What happens to the funds in my 529 plan if my child doesn't go to college?

If your child decides not to go to college, you basically have three options: do nothing, change the beneficiary, or withdraw the money.

First, you can leave the funds in the account. It's possible that your child will change his or her mind about college at some point in the future. 529 savings plans generally allow you to keep the funds in the account indefinitely (however, prepaid tuition plans generally require that funds be used within 10 years of the date of expected college entrance). Check the details of your 529 plan for more information.

Second, you can change the beneficiary. All 529 plans allow the account owner to change the beneficiary. As long as the new beneficiary is a qualifying family member, no taxes or penalty will be due. Check with your 529 plan for more details.

Finally, you can withdraw the funds and use them for a non-educational purpose. (You can also do this if you need to use the 529 funds before your child goes to college.) The drawback to this option is that you will owe federal income tax and a 10% penalty on the earnings portion of any withdrawal used for a non-educational purpose, and probably state income taxes too. (An exception to the 10% penalty exists if the beneficiary were to die or become disabled and not go to college.)

Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.

Prepared by Broadridge Investor Communication Solutions, Inc, Copyright 2011