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The Short Answer

What Can You Do if Your 529 Expectations Change?

When life throws you a curve, money left over for college can still be put to good use by other family members.

Question: I've been putting money in a 529 college-savings account for my son ever since he was born. But now that he's getting older, I was wondering: What are my options if he gets a scholarship or doesn't go to college?

Answer: Your first instinct might be to take distributions immediately. After all, if you've been saving for a while, there's a good chance you're talking about a significant amount of money. For the 2010-11 academic year, the average 529 account balance was around $17,000, according to The College Savings Plans Network. But although cashing out might be tempting, think twice. You'll pay federal and state income taxes on earnings from the unused portion of the account, plus a 10% penalty (unless the beneficiary dies, becomes disabled, or receives a scholarship). Furthermore, if you've claimed state income tax deductions for contributions to a 529 plan, you might owe back taxes.

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