College 529 Plans: What To Do When They Don’t Want To Go To College?

studentsWe often recommend college 529 savings plans for our clients.  For most people, they are by far the best way to save for college.

But here’s a question many parents or grandparents worry about and need answered:

What happens to the funds in the account if my beneficiary decides not to go to college? 

Here’s some guidance provided by the Utah 529 Plan (UESP), which is one we often recommend to clients.  UESP’s investments are managed by Vanguard.(Note that plan rules may differ slightly from state to state).

Give them time to change their mind

“There is no age limit for when a beneficiary can use their funds. If your beneficiary is able to benefit from higher education or a graduate degree in the future, their account can be waiting,” explains UESP.

Withdraw the funds

You can always take the funds out.  However, if they are not used for qualified higher education expenses for the named beneficiary, the earnings will be subject to income taxes, plus a 10% penalty. If the recipient is in a low tax bracket, this might not be such a big deal, but always do the calculations before withdrawing. (Hint: you might be able to save on taxes by carefully planning exactly who receives the refund). Keep in mind taxes are assessed on the earnings or growth only.  Your original contributions are returned tax free.

Change the beneficiary

Usually the easiest and best solution is to change the beneficiary to someone else in the family who might use the funds for college or grad school. And wait until you see how broad the list of possible recipients can be!  UESP defines an “acceptable member of the beneficiary’s family” as any of the following:

  •  The father or mother, or ancestor of either
  •  A child (including a legally adopted child) or descendent of a child
  • A stepfather or stepmother
  • A stepson or stepdaughter
  • A brother, sister, stepbrother, stepsister, half-brother, or half-sister
  • A brother or sister of the father or mother
  • A spouse of the beneficiary
  • A brother-in-law, sister-in-law, son-in-law, daughter-in-law, father-in-law, or mother-in-law
  • A son or daughter of a brother or sister
  • A spouse of the individuals mentioned above
  • A first cousin

And here’s a modern twist on 529 plans:  it’s not unusual nowadays to see parents using excess 529 funds to finance their own back-to-school plans or graduate degree.

The Takeaway

With college costs rising faster than anyone could have imagined, we have never yet seen a situation where there was “too much money” in a 529 plan. 

The rules governing 529s are so flexible that it almost always makes sense to use these college-savings vehicles as your plan of choice.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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