Lynn Brenner Lynn Brenner

Brenner answers questions about all aspects of family finance.

My son has three 529 college saving plan accounts that were started for him at birth by three family members. But he has autism, and I'm not sure he will be going to college. Are there any alternatives for use of that money if a child is unable to attend college due to a disability? Can we close the accounts and recoup the money that was invested? I'd hate to see it just be lost.


Don't worry, the money doesn't have to be lost.

For readers who don't know, the money earned in a 529 account is tax-free when used to pay the account beneficiary's qualified educational expenses. ("Qualified" expenses include tuition, fees, books, room and board, but not interest on student loans.) Let's say the original investment was $4,000, and 15 years later the account balance is $10,000. If you used it to pay for qualified expenses, the entire $10,000 withdrawal would be tax-free. The earnings qualify for the tax exclusion; and the principal has already been taxed.(Depending on who made the contribution, the principal may avoid New York tax: a state resident can deduct up to $5,000 or $10,000 for a married couple filing jointly -- of annual contributions to New York's 529 plan, if he or she is the account owner.)

If you don't use a 529 account for qualified college, graduate or vocational school expenses, the earnings -- in this case, $6,000 -- are subject to income taxes and a 10 percent penalty, which are paid by the account owner, typically the parent or the relative who set it up.

But the 10 percent penalty is waived if you can show the account was terminated because the beneficiary is disabled or died, or that the money was not used for qualified expenses because he received a scholarship.

Alternatively, you can name another family member as the account beneficiary and use it to pay for that person's education. Eligible candidates include your son's parents, grandparents, siblings, aunts, uncles, nieces, nephews and all their in-laws, and his first cousins.

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The bottom line The account holder can change 529 account beneficiaries without triggering taxes or penalties.

Websites with more information and