You can accumulate federal income-tax-free earnings with a Section 529 college savings plan account. 

Then, you can take federal-income-tax-free withdrawals to cover qualified education expenses, usually for college. 

Great! But what if your designated account beneficiary decides not to attend college?

What are your options, and what are the federal income tax consequences for those options?

Exercise Patience

Your wavering account beneficiary may still decide to go to college after spending some time doing something else. 

Unless the 529 plan restricts how long the account can remain open, you can leave the funds invested for years. The money will be there if your beneficiary decides to go to college later. 

Change the Account Beneficiary

If you funded the 529 account with your own money, you are the account owner and can designate the account beneficiary.

As the account owner, you can also change the beneficiary. 

You can change the beneficiary on a tax-free basis as long as the new beneficiary has one of the following family relationships with the original beneficiary:

• spouse, 
• sibling,
• step-sibling,
• first cousin, or
• spouse of first cousin. 

Less likely individuals include the original beneficiary’s brother-in-law or sister-in-law. 

Much less likely individuals include the original beneficiary’s

• child, 
• stepchild, 
• foster child, 
• adopted child, 
• other descendent, 
• son-in-law, 
• daughter-in-law, 
• parent, 
• step-parent, 
• father-in-law, 
• mother-in-law, 
• niece or nephew or their spouse, or 
• aunt or uncle or their spouse.

Depending on the 529 plan, you can fill out a beneficiary change form online or print and mail it in. 

You can also do a tax-free rollover of a 529 account balance into a new account set up for a new beneficiary with one of the above-listed family relationships to the original account beneficiary.

Warning. If the 529 account was funded with money from a custodial account that was set up for the person who is the account beneficiary, that person is the account owner as well as the account beneficiary. So, the funds in the 529 account belong to that person. 

If you are the custodian of the 529 account, you are legally obligated to manage the account for the account beneficiary’s benefit, and you don’t have the power to change the beneficiary. 

Once the beneficiary becomes an adult under applicable state law, that person assumes legal control over the 529 account. That person could then change the beneficiary to one of the aforementioned family members on a tax-free basis or arrange for a tax-free rollover to one of those family members.

Take Advantage of the Broad Definition of Qualified Education Expenses

You can take tax-free 529 account withdrawals to pay for technical and professional schools as long as the educational institution participates in financial aid programs sponsored by the U.S. Department of Education. Almost all postsecondary educational institutions will pass that test.

You can also take tax-free 529 account withdrawals to cover expenses to attend a registered apprenticeship program.

You can take tax-free 529 account withdrawals to pay up to $10,000 of annual K-12 tuition expenses. 

You might do the K-12 withdrawal for a new account beneficiary with one of the family relationships to the original beneficiary. Or you might set up a new account for someone with one of those relationships and fund it with a rollover from the original beneficiary’s 529 account. 

Finally, you can take tax-free 529 account withdrawals to cover principal or interest payments on qualified education loans owed by the account beneficiary or a sibling of the beneficiary, subject to a lifetime limit of $10,000.

Take Tax-Free Withdrawals for Your Education Expenses

Suppose you funded the 529 account with your own money (as opposed to funding the account with money from a custodial account set up for the Section 529 account beneficiary). In that case, you can change the account beneficiary to yourself, return to school, and take tax-free withdrawals to cover your qualified education expenses. 

Drain the Account

If you choose this option, you pay taxes on the earnings included in your withdrawals that you use for other than qualified education expenses. And you likely have to pay the 10 percent penalty tax on those earnings.

Warning. You may not take money out of a 529 account if it was initially put there from a custodial account that was created for the person who is supposed to benefit from the 529 account.

Any money taken from the 529 account legally belongs to the custodial account beneficiary and can only be used to benefit that person—such as buying your 20-year-old non-student a car. 

Once the beneficiary becomes an adult under applicable state law, that person assumes legal control over the 529 account and can do whatever he or she wants with the money, subject to the tax considerations explained here.