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The 529 Plan is a great way to save for college. They offer stock market like returns, state tax deductions, tax deferral, and if used for qualifying educational expenses can even be tax-free. With these significant advantages, the one nagging question everyone asks is the say. What if we do not need the money for college?

Luckily, there are a few solutions.

Non-Qualified Withdraws

What if my child doesn’t go to college? This would be the worst case scenario. You’ve put aside money for the last 18 years, and little Jimmy decides to join the circus. If you take the money out of the 529, you will pay taxes on the gains and a 10% penalty. It’s not that large of a penalty.

For example, if you put $10,000 into the 529, and not it is worth $25,000, and you take the full $25,000 because Jimmy needs to buy a harness to practice his trapeze act. Since you had a profit of $15,000, you would pay tax based on your income tax rate. You would also have a penalty of $1,500.

This is not much different than just investing in a taxable brokerage account.

Penalty-Free Withdraws

Some withdraw are taxable but do not have the additional tax penalty. If your child receives needs-based scholarships, you can remove the amount of the scholarship with only tax on the gains. The 10% tax penalty would not apply.

Other examples of withdraws without a penalty include:

– entering military service

– receiving assistance through a qualified employer program

– the death of the beneficiary

In this case, you would only pay tax on the gains and no 10% penalty.

Change the Beneficiary

One of my favorite advantages of 529 plans is the ability to change the beneficiary. If your child does not use the 529 funds, you can pass the fund on to another family member.

While the list is long, I like to boil it down to “up, over or down.” You can pass the funds up to the beneficiaries parents, over to a sibling or down to a child or grandchild. Technically the list is longer; it included step-family, in-laws, and cousins.

The ability to pass the funds on opens up a compelling alternative to just taking a withdraw. Since you can pass the funds on to a sibling, if the first child does not go to school, or leaves 529 funds left over, you will have more funds available for your younger children.

The legacy 529 Plan is a concept that takes leftover 529 plans and supercharges them. The idea is merely leaving the funds in the 529 until the beneficiary has children and letting this new child be the new beneficiary. While this is not very complex, it can be very powerful to allow the funds to grow for another 20 years.

The 529 is an excellent tool because it offers tax advantages and a superb opportunity for powerful returns. Not only does the 529 plan have these significant advantages, but as you can see the most considerable disadvantage isn’t that disadvantageous.