One of the most frequently asked questions Ohio’s 529 Plan, CollegeAdvantage, hears is, “What happens if my child decides not to go to college?” It’s an understandable concern for those parents who have been saving in a 529 plan for their child’s future higher education costs.
The answer is that you always have multiple options and can always access the funds saved in your 529 account. Ohio’s 529 Plan offers some guidance on what alternatives are available for you.
Not just for four-year colleges
Is your child not interested in attending a traditional four-year collegiate program? Your 529 plan is made to work at any institution of higher education that receives federal financial aid. Check the FAFSA (Free Application for Federal Student Aid) website to search for your Federal School Code. If the institution has a Federal School Code, then you can use your 529 plan there.
Your 529 account can cover qualified costs at community colleges, technical, art or music schools, or vocational schools. Vocational or trade schools provide a great education in specialized skills. Because of these schools’ close connections to professional trades, your child may graduate with a full-time, well-paying job already lined up. The schools’ areas of expertise may range from broadcasting, cosmetology, culinary arts, diagnostic imaging, graphic design, information technology, massage therapy, mortuary science, nursing, restaurant management, truck driving, to welding, to name a few.
Hold onto your 529 account
As you know, balancing a job and life is hard. Your child could change their mind about earning a higher education once they enter the work force. They could discover their career calling while working and then want to pursue a college degree or vocation training to further their skill sets and knowledge in that field. They may decide to start at a local community college or trade school, working their way through school before completing a four year degree later.
The good news is that a 529 account does not have a time limit on it; the funds within the account are available for use at any point in your beneficiary’s life, whether at 18, 28, 58, or 78. Whenever they decide to finally seek a college education or vocational schooling, your 529 plan is ready to cover their qualified higher education expenses. Until that time, your college savings account can continue to build through tax-free earnings.
Member of the family
What if everyone in your family agrees that your child won’t be continuing their education past high school? You can always transfer the 529 funds from your child to another beneficiary. This can be anyone who is related by blood, marriage or adoption. To avoid tax penalties, the new beneficiary must be a family member to your child — this can include siblings, stepsiblings, stepparents, cousins, nieces and nephews. You could also hold onto the account for your grandchildren’s future college costs since there are no time limits for using 529 plans. And, if you’re a grandparent who owns accounts for multiple grandchildren, you can transfer from one grandchild to another, whether they’re siblings or cousins. You can even roll over the account to yourself to fund your own continuing education.
A major tax advantage of a 529 plan is tax-free withdrawals for qualified higher education expenses. If however, you reach a point where your 529 account is simply not going to be used, you can request a non-qualified withdrawal from your 529 plan. This means that the earnings-only portion of the withdrawal will be taxed on the federal, state, and local level. Like other tax-advantaged saving programs, there will be a 10% federal tax penalty assessed for withdrawing money from the 529 plan for costs that aren’t considered qualified higher education expenses. As the 529 account owner, you can direct the non-qualified withdrawal to your child who is the account beneficiary. Before you elect to make a non-qualified withdrawal, first talk with your financial advisor or tax consultant to evaluate your options.
Military academy exception
Does your child not need the funds saved in the 529 account because they will be attending an U.S. military academy? If so, then you can make a non-qualified withdrawal from the 529 account up to the estimated cost of attending the military academy without incurring the 10% federal tax penalty. The earning portion only of the withdrawal will be subject to federal, state, and local taxes.
Expenses for special-needs children and ABLE rollover
If your child may not head off for a higher education due to a disability diagnosis, your 529 plan can still support them. Here are three options.
First, 529 plans cover a qualified higher education expense that’s often overlooked — certain expenses for a special needs students. The IRS Publication 970 “Tax Benefits for Education,” describes this as “expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school.” Therefore, if your child wants to go to college, then your 529 plan can also cover the additional services needed for their higher education.
Second, you can make a non-qualified withdrawal from the college savings plan based on your child’s disability as long it meets the IRS’ specific definition found on page 53 of the IRS Publication 970. It states, “A person is considered to be disabled if he or she shows proof that he or she can't do any substantial gainful activity because of his or her physical or mental condition. A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration.” Like the military academy exception, you can request a withdrawal and 10% federal tax penalty will not assessed. However, the earnings-only portion of the withdrawal will be subject to federal, state, and local taxes.
Third, the Tax Cuts and Jobs Act of 2017 allows for rollovers from 529 plans to an ABLE (Achieving a Better Life Experience) account without any penalty, as long as the account is for the same child or another member of your family. This new law went into effect after Dec. 22, 2017. IRS Publication 907 “Tax Highlights for Persons With Disabilities,” further describes these changes, including the current total annual contribution limit of $15,000 for 2018.
Again, if your beneficiary doesn’t pursue higher education, you have options and you always have access to all the funds saved in a 529 plan. You can wait to see if they choose to earn a higher education, roll the account over to another family member, or make a non-qualified withdrawal. Depending on the circumstance you make withdrawal will determine if there will be taxes applied on the earnings in the withdrawal and/or a 10% federal tax penalty will be assessed. You should always consult your financial advisor or tax consultant before making any decisions on how to use your 529 account under these circumstances. Ohio’s 529 Plan, CollegeAdvantage, is your plan, your way.