Q&A: Fully Funded 529 Plan But Kids Aren't Going to College

Question: When I received my two 529 account statements at the end of the last calendar year, I was stunned at how much they had grown — and then I realized I have a problem. My son has decided he wants to be a plumber, and my daughter has decided she really doesn’t want to go to college. I have about $160,000 sitting in the two 529 accounts. What should I do?

Ric: Your situation illustrates why we get concerned about people overfunding 529 plans. Who knew when your children were 5 years old that they would grow up not wanting to attend college? Or they might win a scholarship and not need the money?

Now you find yourself having to pay taxes plus a 10% penalty when you make withdrawals.

I have three possible solutions for you:

First, you could transfer these accounts to benefit your nieces or nephews. You might strike a deal with your brothers and sisters: You’ll retitle your two 529 accounts (with $80,000 in each of them), and they will give you $80,000 over the next few years in exchange (to avoid gift taxes).

A second option is for you to go back to college — not necessarily for a degree, but for something like an archaeological expedition to Egypt. Many universities offer trips with an educational component, and you can use 529 accounts tax-free to fund some of them. You could even transfer the accounts to your parents if they are able and would like to go on such an expedition. You’ll need to change the beneficiary designations before making any withdrawals.

A third option would be to leave the money where it is, wait until you have grandchildren and then retitle the beneficiary designations into their names. There’s no expiration date on when the funds have to be used, so this can give you two more decades or so of compound growth.

Of course, by then college might be entirely free, thanks to exponential technologies affecting the delivery of higher education — but that’s a conversation for another day!

Originally published in Inside Personal Finance June 2014

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