While a 529 college savings plan is set up in the name of a particular person, there are still ways to change the beneficiary of such an account. This can be useful if a child ends up not attending college or because of scholarships, other funding sources or any other reason not requiring as much money as was assumed when contributing to the account.
529 Plans and Beneficiaries
Somewhat similar to Roth IRAs used for retirement savings, you are typically charged federal tax on money you contribute to a 529 college savings plan. You are not charged federal tax for the additional money earned in interest, capital gains or otherwise while the funds are in the account, as long as it's withdrawn for allowed educational purposes for the beneficiary. Typically, you'll name a beneficiary when you set up the account, and it can be yourself, a relative or anyone.
Some states will let you avoid state tax on the money you put into the account as well as the funds you withdraw for that beneficiary's education. Allowed expenses can include college tuition, room, board and other expenses, or tuition up to a certain amount at an elementary or secondary school.
If you simply withdraw funds from the account for some other purpose, you'll generally have to pay taxes on those gains as well as a penalty.
You can generally change the beneficiary of a 529 plan without any tax penalty, which will let you use the funds for another person, like another child, without changing how much you'll save by having the plan. You can even set up a plan naming yourself as beneficiary before you have a child and later change the plan to pay for that child's education. Talk to whoever runs your plans about the paperwork involved.
If you switch the beneficiary from a grandparent to a grandchild, and the grandparent has a very large estate when he or she passes away, you may then face a tax known as the generation-skipping tax at that time.
In some cases, you may face state tax effects, so it can be best to check with your state's tax office or a tax advisor before making such a change.
Rolling Over 529 Plans
You can also roll funds over from one 529 plan to another for the same beneficiary, which may be useful if one plan offers better investment opportunities, lower fees or otherwise better arrangements for your needs. You will likely want to work with the old and new plan to make sure the rollover happens in accordance with tax rules to make sure you don't face unnecessary penalties.
Items you will need
- Recent account statement
- Transfer forms
- New 529 account information
- If you're not comfortable handling a check, you can ask your new 529 plan administrator to initiate the a direct transfer of the funds on your behalf.
- If the child you transferred the funds to doesn't use them, you can always transfer the money to a 529 plan for yourself or another qualified beneficiary.
- Funds from the old 529 plan must be deposited into the new account within 60 days to avoid a tax penalty.
- If your child uses the transferred 529 plan funds for any purpose other than qualified education expenses, you might be subject to a tax penalty.
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