Summary
- More high school graduates are pursuing careers in the trades rather than a traditional college education
- Trade schools are typically less expensive, and often certifications can be given through apprenticeships
- You can reassign the beneficiary on a 529 to another child or grandchild without penalty, and the money will continue to grow until that child is ready to use the funds
- Any excess funds can be reassigned to another beneficiary, as long as the funds are used for qualifying educational expenses.
If you decided it’s better to save for your children’s college education rather than borrow, you have probably wisely invested in a tax-advantaged 529 plan. However, it’s not unusual for young people today to not pursue a college education, preferring to go to a trade school or ‘non-traditional’ college. What can you do with your investment then?
Post-high school education institutions may still qualify
If your child decides to go to trade school, you may be able to withdraw some funds towards their education both at home or abroad. The school they choose must participate in a student aid program administered by the Department of Education. According to the IRS, there are some vocational schools, trade schools, and other secondary educational institutions that qualify for withdrawals and you can check with your plan’s administrator.
Change the beneficiary
One of your best options is to change the account’s beneficiaries so that the investment can remain tax-free. Beneficiaries can include another family member, including yourself, a first cousin, uncle, grandparent, grandchild, and even adopted and foster children. Since 529 plans are free of withdrawal rules, there is no limit to when the money can be used.
Expenses that qualify do not only include tuition but also covered books, supplies, other required fees, lodgings, and computer-related expenses.
Even if the beneficiary you add already has their own 529 plan, there is no limit to how many 529 plans they can be a beneficiary of. However, according to the publisher of SavingForCollege.com, Mark Kantrowitz, a child’s eligibility for financial aid can be affected if they are the beneficiary of more than one account.
He said in an interview with CNBC, “It may reduce their debt or get them into a more expensive college.” He also added that there would be no tax consequences because of the extra money from the 529 plan.
Since most 529 plans allow you to change beneficiaries once a year, you can take advantage to convert the plan again should your child change his mind about pursuing a college education.
Pay off tuition expenses
With a 529 plan, you also have the option of paying off tuition expenses for a child’s elementary, middle, or secondary school (public or private). This was ruled by the Tax Cuts and Jobs Act of 2017. There are some restrictions in some states, so research this first.
If you or one of your children have an existing student loan, the SECURE Act of 2019 allows the withdrawal of up to $10,000 to pay it off.
Taking the cash
One of the main benefits of creating a 529 account is its tax-free earnings. However, you could consider taking the cash to use on something else, but you will be liable for federal and income taxes on the amount saved. You will also pay a 10% penalty on its growth. The only time the penalty is waived is if the beneficiary of the 529 gets a full college scholarship.
According to Forbes, tax-advantaged college savings can yield superior after-tax returns long-term. But, because of their restrictions and drawbacks, they should not be used as tax shelters. However, they were created to encourage higher education in Americans. Investors can still get some advantages from them, even if their offspring decide to not attend college.
