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What Are the 529 Plan Rules If My Child Doesn't Go to College?

Updated: March 2017

Many parents have this common question about investing in a 529 college savings plan: "What if my child doesn't go to college? Do I lose my invested money?"

The simple answer: No, you won't lose your money. The funds in your 529 plan can be used in a number of ways, even if your beneficiary decides not to pursue higher education.

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Think Beyond Traditional 'College.'

Your child doesn't necessarily have to go to a four-year college or university in order to use 529 funds. Any school that participates in financial aid programs administered by the U.S. Department of Education — including vocational, technical and even specialty educational institutions — may qualify for use of 529 funds, according to the Internal Revenue Service (IRS). Just to be safe, however, check with your tax professional in advance of any withdrawals.

Send Another Family Member to School.

You can change the beneficiary of your plan. Your new beneficiary can be any qualified family member of your current beneficiary, according to the IRS. That could include another one of your children; your niece or nephew; your grandchild; or even your son- or daughter-in-law.

Go Back to College Yourself.

The new beneficiary you choose for your plan could also be you, says the IRS. If you've always wanted to take a few art classes, or think you could benefit from a Master's of Business Administration (MBA) degree, for example, you can use those 529 funds to finance your own educational adventure.

Let the Money Grow.

You may be able to leave the money in your 529 plan invested for as long as you like, according to The Wall Street Journal. That way, if your child decides later in life to attend college, the 529 funds would still be available. Otherwise, the money could eventually go to another beneficiary of your choosing.

Some states have age-based regulations or rules about how long unused money can be left in your account, so be sure to check with your plan provider before choosing this option.

Withdraw It (Possibly with Penalties).

You are allowed to withdraw any unused 529 money. Keep in mind, however, that you'll owe federal and state taxes on the funds, along with an additional 10 percent penalty on your account's earnings, according to the Financial Industry Regulatory Authority (FINRA). If you withdraw your 529 funds because your beneficiary dies, becomes disabled or has earned scholarships and doesn't need the money, the 10 percent penalty may be waived, FINRA says.

A 529 plan is flexible enough so you won't have to forfeit your investments, even if your child chooses not to go to college. Have questions about starting a 529 plan or using its funds? Talk to your tax professional, financial professional or the administrator of your plan before you invest.

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This content is for informational purposes only and may not be applicable to all situations.

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