You’ve spent years saving diligently for your daughter’s education, only to learn she’s decided not to go away to college after all. If you have thousands stashed in a 529 plan, you might be wondering: What happens to that money now?
At the end of 2024, roughly 17 million 529 plan accounts were open in the United States, worth a collective $525 billion in total assets. A 529 plan remains one of the most flexible education savings tools available, but it’s also one of the most misunderstood.
That’s because even if plans change, 529 college plan funds can end up being used for things that have nothing to do with traditional notions of higher education. If it involves learning, there’s a solid chance your 529 savings can help cover related expenses.
"It’s important for Americans to understand how flexible 529 plans have become,” said Andy Esser, a financial advisor Andy Esser at Edward Jones, which issued a report in May that found 52% of respondents said they didn’t know what 529 plans are.
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What is a 529 plan and how does it work?
Named after Section 529 of the Internal Revenue Code, 529 plans are tax-advantaged saving plans for future education costs. They come in two main types: prepaid tuition plans and education savings plans.
The plans typically involve contributing after-tax dollars and any investment growth is tax-free as long as withdrawals are used for qualified education expenses. These plans were created to make saving for college more attractive by reducing the sting of taxes on those savings.
Typically, families use 529 money to pay tuition, fees, room and board, books — even certain technology costs at eligible institutions. In recent years, the definition of qualified expenses has expanded: You can also use up to $10,000 per year for K–12 tuition at private schools and even make limited payments toward student loans.
The catch: If you use the money for anything that doesn’t qualify, you’ll owe ordinary income tax on the earnings portion of the withdrawal plus a 10% penalty, seriously eroding the value of your savings.
What happens if your child doesn’t go away for college?
If your daughter isn’t heading off to a four-year college campus, your first step is to figure out whether she’s forgoing higher education entirely or simply choosing another path. The good news is that “qualified education expenses” don’t just mean traditional, residential college costs.
If she’s planning to attend a local community college, a trade school, or even take classes online from an accredited institution, you can still use 529 funds to cover tuition and other eligible expenses without penalty. Many families don’t realize that accredited vocational and technical schools are also fair game for 529 plans. Even if she commutes from home, her tuition and fees may be covered.
If she’s decided to study part-time, you can still use the funds proportionally for eligible costs. Some families find that room and board expenses aren’t needed if their student is living at home, but tuition, books and required supplies continue to qualify.
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What exactly are qualified education expenses?
Qualified expenses include tuition and fees at eligible institutions, books and supplies required by the program, certain technology costs (like a computer or software, if it’s required) and room and board for students enrolled at least half-time.
For K-12 education, you can withdraw up to $10,000 per year per student for tuition at private or religious schools. There’s also a provision that allows up to $10,000 lifetime per beneficiary to pay down qualifying student loans.
This all means that if your daughter is still interested in some form of learning, just not in the way you initially planned for, you may be able to spend most or all of the 529 balance penalty-free.
What if your child opts not to pursue formal education at all?
Let’s say your daughter has decided to forgo college, trade school, or any eligible training program altogether. You still have options.
You can leave the money in the 529 account indefinitely. There’s no rule that says the funds must be used short-term. The account can keep growing tax-free. Your daughter might change her mind in the future — even as an adult.
You can also change the beneficiary of the 529 plan and transfer the funds to another child, a niece or nephew, yourself, or even a future grandchild without triggering taxes or penalties, as long as the new beneficiary is a qualifying family member.
If none of these options work for you, consider rolling some of the unused funds into a Roth IRA for your daughter. Thanks to recent rule changes, up to $35,000 of unused 529 funds can be rolled over to a Roth IRA in the beneficiary’s name over their lifetime, starting in 2024, subject to annual contribution limits and eligibility rules. This can turn unused education savings into retirement savings — a smart long-term play.
Lastly, if you decide to take the money out for non-education expenses — say, buying a car or making home improvements — you’ll face that 10% penalty and pay ordinary income tax on the earnings portion. Only your original contributions come out tax-free, as you already paid tax on them. That could make non-qualified withdrawals the option of last resort.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
