I invested $200K in my daughter’s 529 plan. She doesn’t want to go to college. What should I do with this money?

I saved a significant amount of money ($200,000) for my daughter’s 529 account, but she doesn’t want to go to college, or any other school. Are there any other ways I can consider transferring the wealth to her? I’m thinking of transferring the money to her Roth IRA, which was established when she was a teenager. I would take a hit for an unqualified expense, right?

The Mother

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It’s a generous donation to your daughter’s education, if a sadly unrealized one.

You have limited options for a tax-advantaged rollover. Yes, it’s possible to move some of this money to your daughter’s Roth IRA. But there are several restrictions. There is a lifetime limit of $35,000 for each Roth IRA beneficiary without incurring the required 10% penalty for nonqualified withdrawals or incurring a tax hit on the withdrawal. Nor can contributions exceed the annual $7,000 contribution limit.

That’s not going to help you, given that your 529 plan is worth $200,000. The 529 plan must have been created for your daughter for at least 15 years before any rollover, and she must have income of at least the same level as the rollover amount. There are other options, including using the 529 plan to pay off student loans and K-12 education, but there are $10,000 lifetime limits per beneficiary.

There are other education options. “Tuition costs for graduate school and two-year community colleges are considered qualified expenses for 529 funds,” Edward Jones says. “Additionally, many vocational schools — including cosmetology schools, culinary schools, technical colleges and electrical trade schools — have the same penalty- and tax-free treatment of 529 plan funds.”

“Many of the expenses associated with apprenticeship programs — such as for mechanics, plumbers and electricians — can be paid for with 529 plan funds,” Edward Jones adds. “These programs, which allow hands-on training while earning a salary, are gaining popularity as an alternative to college, if the apprenticeship is certified and registered with the U.S. Department of Labor’s National Apprenticeship Act.”

So here’s the bad news. If and/or when you take money out of the 529 plan, you will pay federal income tax on the earnings portion of any non-qualified withdrawal from the 529 plan, in addition to a 10% federal penalty on those earnings. The amount of income tax is proportional to the size of the withdrawal. Some states also levy a tax (California, for example, imposes a 2.5% state income-tax penalty).

“While rollovers may be an option for those wondering what to do with unused 529 plan assets, funding a Roth isn’t the primary selling point of these college saving accounts,” according to Saving for College, an online resource based in Miami. There are, however, exceptions to the 10% withdrawal penalty, even though the earnings portion of the distribution is still subject to state and federal income tax.

The 10% penalty may be waived, the site says, if a beneficiary dies or becomes disabled, receives a tax-free scholarship, receives educational assistance through a qualifying employer program, attends a U.S. military academy or if the taxpayer used qualified education expenses to generate the American Opportunity Tax Credit (AOTC) or the Lifetime Learning Tax Credit (LLTC).

Otherwise, it’s best to make the withdrawals over time and/or when your income is lower. You can also gift your daughter the money you withdraw (after taxes and penalties) given that you have a $13.99 million lifetime gift-tax exclusion; you can gift $19,000 as a single person to a beneficiary every year without having to file a tax return. Or you could also roll it over to your future grandchildren.

And who knows? Your daughter may, over time, have a change of heart.

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