529 Plans

What to Do With a 529 Plan When a Child Doesn't Go to College

Families can avoid taxes and a penalty on a 529 college-savings plan when a child develops a disability and likely won’t be using the money for college.


I contributed to a 529 plan for my young son, who a few years later was diagnosed with autism and now may not attend college. Can I use the money for anything else without incurring a tax or penalty? I don’t have other children.

Answer: There are several ways to avoid paying a penalty if your child doesn’t end up going to college, including a new option designed specifically to help families who have children with special needs.

You can use money invested in a 529 tax-free for college tuition, room and board, fees, required books and a computer for a student. And a new law lets you withdraw up to $10,000 from a 529 account each year to pay tuition for kindergarten through 12th grade. (See 529 Savings Plans Have More Uses, But States Need to Catch Up.) Or you can change the beneficiary to another eligible family member, including the original beneficiary’s siblings, cousins, parents, aunts, uncles, spouse, children or in-laws.

If you don’t use the 529 funds for eligible expenses, you usually have to pay taxes and a 10% penalty on the earnings portion of the withdrawals.

You may be able to withdraw money from the 529 without penalty if your son meets the IRS’s definition of disability, but you will have to pay taxes on the earnings portion of the withdrawals. That definition of disability is very specific: You must be able to show proof that the 529 beneficiary can’t do “any substantial gainful activity because of his or her physical or mental condition. A physician must determine that the condition can be expected to result in death or to be of long-continued and indefinite duration,” according to the IRS. For more information about the rules, see the “qualified tuition program” section of IRS Publication 970, “Tax Benefits for Education.”

There’s now another option that can be particularly helpful for families who have children with special needs. Under the new tax law, you can roll money over from a 529 account into a state-sponsored ABLE account (the acronym stands for Achieving a Better Life Experience) that can be tapped tax-free for a broad range of expenses. “It can be used for anything that will improve the health, independence or quality of life of the person with the disability,” says Kaellen Hessel, advocacy and outreach manager at the Oregon Savings Network, which administers the state’s ABLE plan.

A big advantage of an ABLE account is that a child can save and invest a significant sum without jeopardizing federal benefits, such as Medicaid. Generally, if people with disabilities have more than $2,000 in their name, they lose Supplemental Security Income or Medicaid. Now they can save up to $100,000 in an ABLE account without affecting SSI benefits, and ABLE balances of any size don’t affect Medicaid eligibility.

People of any age who developed a qualifying disability before age 26 can open an ABLE account. You can make a tax-free rollover from a 529 to an ABLE, up to the maximum ABLE contribution limit each year ($15,000 in 2018), minus any other contributions that have already been made to the ABLE account for the year.

Such rollovers have been an answer for families that started saving in a 529 only to find out later that a disability might put a child’s college plans on hold. “I would get calls from people who had children who were newly diagnosed with autism and had already put money aside in a college savings account and didn’t know what to do,” says Stuart Spielman, senior policy adviser for Autism Speaks. “Now they can roll it into an ABLE account, which helps families who are getting a diagnosis plan for the future.”

Currently, 36 states and the District of Columbia offer ABLE plans, and more are on their way. (You can invest in any state’s ABLE plan, but your own state might offer a tax deduction for contributing to its plan.) The website of the ABLE National Resource Center includes a list of states and links. Many states are still in the process of implementing the new 529-to-ABLE rollover provision, so contact the ABLE to find out about the procedure.

For more information about ABLE accounts, see ABLE Accounts Give Disabled More Financial Freedom.

Most Popular

Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
How to Know When You Can Retire

How to Know When You Can Retire

You’ve scrimped and saved, but are you really ready to retire? Here are some helpful calculations that could help you decide whether you can actually …
January 5, 2022
The 12 Best Tech Stocks to Buy for 2022
tech stocks

The 12 Best Tech Stocks to Buy for 2022

The best tech-sector picks for the year to come include plays on some of the most exciting emergent technologies, as well as several old-guard mega-ca…
January 3, 2022


Why Your New Social Security Check May Be Less Than You Thought
social security

Why Your New Social Security Check May Be Less Than You Thought

Watch out, because these three supposed “rules” about Social Security benefits may not actually apply to you.
January 13, 2022
Could You Lose Your Job if You Get COVID-19?

Could You Lose Your Job if You Get COVID-19?

With omicron surging, many are losing the ability to work. Can they get fired? Will they get paid time off? It depends.
January 12, 2022
Biden Extends Suspension of Student Loan Payments

Biden Extends Suspension of Student Loan Payments

The president gave borrowers another 90 days until May 1 before they have to start paying back their student loans.
December 22, 2021
Take This Job, I'm Retiring
Financial Planning

Take This Job, I'm Retiring

The pandemic and bull market have led to an increase in the number of workers who are retiring. You might call it the Gray Resignation.
December 21, 2021