529 Plans: What Happens If Your Child Doesn't Go To College

A 529 Plan is one of the best ways to start saving for your child's education. Contributing to a 529 Plan regularly, starting when your child is born, gives the account at least 18 years to grow tax-free if the investments within the account do well. Even better, when it is time to withdraw money from the 529 Plan, you don't have to pay taxes on the investment earnings. Depending on the 529 Plan you choose, you might enjoy a deduction on your state income taxes.

However, when you start saving for your child's education, you cannot possibly predict what she will want to be when she grows up. Luckily, 529 Plans do not go to waste if your child chooses a path in life that doesn't involve a stop in college. You have several options regarding what to do with the money you've saved in that 529:

Leave it in the 529 Plan. People change their minds all the time, and your child may decide to go to school at a later date. Also, eligible schools aren't limited to four-year institutions. If your child is interested in learning a specific trade, visit savingforcollege.com, and enter the name of the trade school, or search by state to find out which schools are eligible and which ones aren't.

Change beneficiaries. One of your younger children, your spouse or even a member of your immediate family-including stepchildren, stepsiblings and stepparents-may want to attend college. There are no age limits, so anyone in your family could go back to school. All you need to do is contact your 529 Plan provider and rename the beneficiary.

Use the money for your own education. If you don't have another child and always wanted to go back to school, you can name yourself the beneficiary, as long as the money you take out is put toward the appropriate educational expenses. Keep in mind that, with a 529, the plan donor has control of the money, not the beneficiary. Just because your child decides not to go to college does not mean the money must go to her.

All of these options work as long as you keep the money in the account. Taking out any of the money leads to a 10% penalty, plus taxes on the amount your account gained.

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There's only one great way to save for college: with a 529 plan. This plan, named for the section of the Internal Revenue Code that created it, is a type of investment account.

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