Our child will not go to university. What about our 529 plan?

Q. We have about $28,000 in a 529 plan for our son, but now he’s not going to college. I can’t decide if I should just withdraw the money and eat the penalty, or leave it there in case I have grandchildren. But it would be far in the future and it is not certain. What should I consider?

– parent

A. 529 plans are a popular way to save for college.

But as you can see, not all beneficiaries decide to go to school.

Let’s see how 529 plans work.

The main benefit of these accounts is the ability to pay out after-tax money and grow the funds tax-free, provided they are used to pay for the designated beneficiary’s qualified education expenses. , Darren Zagarola, Certified Financial Planner and Certified Public Accountant. with EKS Associates in Princeton.

Eligible education expenses include tuition, room and board, textbooks, supplies, computers and technology-related expenses, he said.

But what if the designated beneficiary is not attending college?

“First, remember that they don’t have to attend a traditional college. Funds can be used for tuition at any trade or vocational school that is a federally approved educational institution,” he said. “This includes culinary schools, sports academies, beauty schools, seminars, etc.”

The IRS has a list of eligible educational institutions that qualify.

If the beneficiary is not attending any type of post-secondary school, there are a few options available, Zagarola said.

One option is to change the beneficiary of the account to another family member, he said.

Or, you can use the funds for something else.

“While most people intend to use 529 plans to pay for their college education, the SECURE Act, passed in 2019, allows up to $10,000 to be used for K-12 tuition. 12th grade,” he said.

You can also, as you suggested, leave the account in the beneficiary’s name and let it grow tax-free for their children to use. In this case, it’s a tax-free perpetual trust that lets you leave a legacy for future generations, illustrating the importance of education for your family, he said.

You can also withdraw the funds for other needs, such as living expenses or retirement savings. In that case, you would pay a tax on account growth and a 10% penalty on that growth, Zagarola said.

He offered this example based on your account balance of $28,000. Let’s say you contributed $20,000 and $8,000 is investment income from the 529 plan. When you withdraw the $28,000, you will receive the $20,000 without tax or penalty. You will pay tax on the $8,000 gain at your ordinary tax rate, then a 10% penalty on the $8,000. Assuming you are in the 22% federal tax bracket, the total cost to you, excluding state income tax, would be $2,560 – $1,760 federal tax and $800 in penalties.

“In this scenario, even after the tax and penalty is paid, you will still have more money than you originally put into the account,” he said.

If you don’t need the money now, consider keeping the account for a future family member to take advantage of tax deferral, Zagarola said. If you possibly have grandchildren, they can benefit from the tax-free account, he said.

“If you need the funds now, consider withdrawing the funds and paying the tax and penalty,” he said. “As you can see in the example, the tax and penalty will only be about 32% of the win, so you’ll pocket about 68% of the win.”

And finally, if you never have grandchildren or identify another family to name as beneficiary, you always have the option of taking the money at that time and continuing to benefit from the free growth. tax, he said.

Send your questions to [email protected].

Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. To find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.

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