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New 529 twist turns unused college savings into a retirement head start

Michael KurkoJanuary 12, 2026 at 9:21 PM

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New 529 twist turns unused college savings into a retirement head start (Drazen_ via Getty Images)

You opened a 529 college savings plan, socked money away and dreamed about the future.

But then your child tells you they don’t want to go to college. Maybe they’re considering trade school, starting a business or just don’t think college is right for them.

If this sounds familiar, you're not alone. College enrollment has fallen 15% since 2010, with the percentage of high school graduates making that immediate leap dropping from 70% in 2016 just above 60% today.

But what happens to your 529 fund when college plans change? Here’s the good news: You haven’t wasted that money because your child won’t be donning a cap and gown. Rather, new laws in 2024 address the "trapped money" problem.

It means that while 529 plans are designed for higher education, they actually offer far more flexibility than most parents realize.

What your 529 plan can actually pay for

At its core, a 529 college savings plan is a state-sponsored, tax-advantaged savings account designed for education expenses. You contribute after-tax dollars, the money grows tax-free and you can make tax-free withdrawals for qualified education expenses like tuition, books and room and board.

While many parents think of 529s only in terms of paying for a bachelor’s degree, “qualified expenses” actually covers much more. And recent legislation expands these options further, making 529 plans more flexible than ever.

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When college isn’t in the cards

A 529 plan isn’t limited to four-year college costs. You can use the funds for trade schools and vocational programs — think: training to become an electrician, welder, plumber or cosmetologist. Community colleges offering associate degrees or certificate programs also qualify.

Your 529 savings can even cover apprenticeships registered with the U.S. Department of Labor, including expenses related to tuition, books and required equipment. Many accredited online courses and certificate programs qualify too, from HVAC repair and culinary arts to coding bootcamps.

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Keeping it in the family

If your child isn’t pursuing any higher education, you can pass the 529 account to another family member without triggering tax penalties. The rules define “family member” broadly, including siblings, cousins, nieces, nephews, future grandkids — even yourself.

It means you can use the money to finish your own degree, pursue graduate school for a career change or save it for future grandchildren to use.

However, there are important limitations to consider. For one, you’re allowed only one rollover per beneficiary within a 12-month period, and transfers must be completed within 60 days of withdrawal to avoid taxation. Generation-skipping transfers — like one from a grandparent to a grandchild — could trigger additional taxes. Gift tax rules might apply to large transfers.

Talk with a tax professional or trusted financial advisor to learn how to best time your transfer and minimize your tax burden when using a 529 plan.

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From college fund to retirement nest egg

Starting in 2024, the SECURE Act 2.0 opened the door for families to roll unused 529 funds into a Roth IRA for your child.

A few key requirements to consider:

Accounts must have been open at least 15 years

Contributions and earnings from the last 5 years are ineligible

Beneficiary must have earned income equal to the rollover amount

Roth IRA must be in the beneficiary’s name — and not the parents’

There’s also a $35,000 lifetime maximum per beneficiary, with rollovers subject to annual IRA contribution limits.

Even though your child won’t be going to college, the upside is a powerful head start — decades of tax-free growth in a Roth IRA, plus tax-free withdrawals to access that money in retirement. Even small amounts can compound into an impressive nest egg for golden years.

Before making any moves, talk with a tax professional or financial advisor to make sure the rules are on your side.

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Surprising ways to use 529 funds

Think your 529 is good only for college? These plans pack more flexibility for your beneficiary than you might realize:

K–12 tuition. Use up to $10,000 per year for private, public or religious schools.

Student loan relief. Apply for up to $10,000 toward qualified loan repayments over the beneficiary’s lifetime.

Skills training and continuing ed. Put the funds toward qualified professional credentials, licensing or registered apprenticeships.

These expanded situations mean your savings can adapt to your child’s evolving needs, whether that’s a private high school, plumbing certification or paying off medical school loans.

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The nuclear option: Cashing out

Nothing is stopping you from withdrawing money from a 529 account for something else entirely, but it comes with a price. The earnings portion gets hit with ordinary income tax plus a 10% penalty. (Your original contributions aren’t taxed because you’ve already paid taxes on them.)

There are exceptions: If your beneficiary receives a scholarship, attends a U.S. military academy, dies or becomes disabled, you’ll pay income tax on the earnings only — no penalty.

With stiff taxes in mind, this is typically a last resort. But for some families facing major expenses — like a home down payment or starting a new business — the penalty might be worth the tradeoff.

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Bottom line: All is not lost

If your child announces they aren’t going to college, take a deep breath. Your years of financial planning weren’t wasted.

You can still use the money to fund trade school. Or transfer it to a sibling who’s going to college. Or roll it into a valuable retirement head start. Or, yes, cash it out for something else.

The key is aligning choices with your family’s broader goals. A financial advisor can help you weigh the tradeoffs and figure out the best use for your situation.

Ultimately, a 529 account was always about your child’s future. You can still accomplish that goal, even if it looks a little different from what you imagined.

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About the writer

Michael Kurko is a finance writer and editor who covers investing, real estate, personal budgeting and financial literacy. His expertise has been featured in FinanceBuzz, The Balance, Investopedia, U.S. News & World Report and Forbes Advisor, among other top financial publications. In addition to his work in finance, Michael is also a freelance book editor and fiction writer. He strives to make complex money topics clear and approachable so readers can make informed decisions and build lasting financial confidence.

Article edited by Kelly Suzan Waggoner

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