Blog — Sisters for Financial Independence

One of the big questions that many parents ask when it comes to funding a 529 Plan is, what happens to the funds if my child doesn't end up going to college? This post is good for parents, grandparents, or aunts and uncles who have started a 529 plan for the children in their lives.

Let’s back track a bit and talk about what a 529 Plan is? A 529 Plan is a tax-advantaged account that allows you to save for future education-related expenses. Earnings can grow tax-free and can be used tax-free as long as it’s used for qualified education expenses. The IRS.gov has a list of those qualified expenses.

No College, No Problem

So imagine all of these years, you’ve been saving for college. Family and friends have contributed to the account. The account has grown thanks in part to your early saving and the stock market growth. Then the time comes for your child to go to college, but they end up not needing the funds for a host of many reasons. One may be that they have received a full scholarship and have no need for the funds, or they’ve decided not to pursue the traditional 4-year university route and instead go to trade school, or they’ve decided to take a break from school so that they can figure out what they really want to do. The good news across all of these scenarios is that you don’t have to forfeit any of the funds in the 529 Account.

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Sample Script on How to Ask Family and Friends to Make a 529 Contribution

Options for Your Money

Option 1: Wait. You do not have to liquidate the account. You can keep your money in there as long as necessary which may prove helpful if/when your child decides to pursue college or an advanced degree. The 529 Plan has no expiration and withdrawal requirements.

Option 2: You can transfer it to another family member like a sibling about to head to college or even yourself should you decide to pursue an advanced degree or change in career.

Option 3: Use it to pay for vocation school. A common misconception is that the 529 Plan is only for college and universities. It can be used for vocational/trade school as well as apprenticeships. You’ll have to make sure that the school is accredited and qualified to use the funds from the 529 Plan and that’s easy to do using the following links:

Option 4: Use the funds to pay for student loans. If in the case that you have another child who didn’t have enough in their 529 Plan to pay for school and ended up accruing some student loans, you can use up to $10K to pay for their student loans.

Option 5: Use the funds to pay for tuition for a sibling in private school. You can use up to $10K to pay for K-12 private elementary or high school tuition.

Option 6: Withdraw the funds. You’ll pay a penalty on it as well as taxes but the money does not completely disappear from your use.

Option 7: Continue to transfer the 529 Account to other family members. if the original beneficiary has no need for the funds, transfer it to another sibling or family member. All account owners should setup a successor participant so that in the event of the account owner’s death, the account transfers to a new owner who can continue to administer your saving strategy. If there continues to be money in the account, you can technically transfer owners and beneficiaries for the life of the account. This helps you preserve wealth, it reduces the size of your estate which saves taxes, and it helps you change a generation’s outcome.

Here’s two more articles for you to consider for using the 529 Accounts as a form of generational wealth transfer:

And if you don’t have kids yet, but absolutely know you will want them in the future, it doesn’t hurt to save into a 529 Plan today setting yourself up as the beneficiary until a child comes along. Here’s why I contributed to a 5289 Account before I had kids.

What happens to the funds within a 529 Plan if you child doesn't go to college? In this video, we go through a few options. The good news is that the money doesn't have to go to waste.