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Alternative Uses of 529 Plans

Last update on: Jun 05 2020

Suppose you set up a 529 college savings plan for a child or grandchild, and now the youngster doesn’t need it. Maybe the child received a full scholarship or won’t be attending college. This article explains that you have several option. The most logical is to change the beneficiary to another child or grandchild, or roll the account into another 529 plan. There are other options.

If you simply need to take out the money for a noneducational purpose, you’ll typically have to pay income taxes on your distribution along with a 10 percent tax penalty on the account’s earnings.

In some specific cases, you can take a nonqualifying distribution from your 529 plan without paying the 10 percent tax penalty. You still have to pay the income tax on the earnings portion of your withdrawal, although that can often be calculated based on the beneficiary’s rate, which is often lower than the savers’. (SavingForCollege.com has a list of those exempted reasons, such as the death of the beneficiary.)

 

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