TimeMachine is a rotational in time backup system limited by the amount of drive space to hold "states" of restores depending upon the days. Old stuff gets deleted for the new changes with TM.
So what you likely can do is setup TM on that 500GB drive and give it some time so it has enough days you should ever need to restore back too.
Then erase the larger drive and repurpose it.
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You should also diversify your backups, you'll find option key bootable clones a immense assistance, it allows you to run the computer off the clone and also make clones from the clone etc.
I have a 2 TB drive I was using for Time Machine. I have another 500GB drive being used for other less important info. I want to swap the drives. Can I copy all my old "backups" from time machine onto the 500GB drive before I reformat the 2TB drive?
If there's enough room on the 500 GB drive.
If the existing backups aren't damaged.
You must format it the same as the 2 TB -- if the 2TB is Mac OS Extended (journaled), the 500 GB drive must be, also. If it's Mac OS Extended (Case-sensitive, journaled), that's how the 500 GB must be formatted.
You can just drag the Backups.backupdb folder from the top level of the 2TB to the 500 GB, or use the Restore tab of Disk Utility, or the 3rd-party app SuperDuper.
When done, just select the 500 GB drive as the destination, via TM Preferences.