529 plans are designed to help save for the future education costs of a single beneficiary. However, the 529 plan account owner may change the beneficiary to a qualifying family member of the current beneficiary at any time without tax consequences by completing a form on the 529 plan’s website.
Can a 529 plan have more than one beneficiary?
A 529 plan can have only one beneficiary. Distributions must be used to pay for qualified education expenses incurred by the designated beneficiary. Non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the withdrawal, plus a possible recapture of state income tax breaks attributable to the non-qualified distribution.
Families with more than one child may use a single 529 plan to save for college, but they can take qualified distributions for only one child at a time. After they are finished paying for college for the first child, the parents should change the 529 plan beneficiary to the next child attending college.
Grandchildren, nieces, nephews or anyone else with future education costs may be also named as a designated 529 plan beneficiary. Sometimes it makes sense for the 529 plan account owner and the beneficiary to be the same person, such as when an adult is saving for their own graduate school or when an expecting parent wants to start saving for college before their child is born.
Parents may change a 529 plan beneficiary if the original beneficiary decides not to go to college or has leftover funds in the 529 plan account after graduation.
Do you have to pay taxes if you change a 529 plan beneficiary?
There are no tax consequences or penalties when a 529 plan beneficiary is changed to a member of the beneficiary’s family. Qualified family members include the beneficiary’s:
- Spouse
- Son, daughter, stepchild, foster child, adopted child or a descendent
- Son-in-law, daughter-in-law
- Siblings or step-siblings
- Brother-in-law, sister-in-law
- Father-in-law, mother-in-law
- Father or mother or ancestor of either, stepmother, stepfather
- Aunt, uncle or their spouse
- Niece, nephew or their spouse
- First cousin or their spouse
How to change a 529 plan beneficiary
Beneficiary change forms can be found on a 529 plan’s website. Depending on the 529 plan, the beneficiary change form may be completed online or printed and submitted by mail. To complete a beneficiary change request, the 529 plan account owner will need to provide:
- 529 plan account number
- 529 plan account owner’s name and telephone number
- Current beneficiary’s name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- New beneficiary’s name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- The amount of the funds to be transferred to the new beneficiary
- Investment allocation instructions
- Signature of the 529 plan account owner or trustee authorizing the beneficiary change
If the beneficiary has undergone a name change, the account owner should provide the 529 plan with a copy of the court order changing the beneficiary’s name. Alternately, the 529 plan account owner can use the beneficiary change form to change the beneficiary’s name.
Changing the 529 plan investment selection
529 plan account owners may choose to select new investment allocations when changing the 529 plan beneficiary. For example, parents who use an age-based investment allocation to save for a child and later change the beneficiary to a younger child should consider adjusting the investment allocation based on the new beneficiary’s age.
If the new 529 plan beneficiary will be using the funds to pay for K-12 education, parents should consider investing the funds in a target portfolio. Target portfolios do not adjust allocations based on the beneficiary’s age, but rather consist on a mix of stocks and bonds based on a desired level of risk (conservative, moderate, aggressive).
Investment allocation instructions are included on the beneficiary change form. The 529 plan account owner may select a percentage of funds to allocate to each investment portfolio the 529 plan offers.
Normally, 529 plan account owners can make only two investment changes per calendar year, but there is an exception when the investment change is requested with a beneficiary change.
As a seasoned financial expert specializing in education savings plans, I bring a wealth of knowledge and hands-on experience to shed light on the intricacies of 529 plans. I have navigated the nuances of these investment vehicles, staying abreast of the latest regulations and practices to empower individuals with sound financial decisions.
Now, let's delve into the key concepts presented in the provided article:
1. 529 Plans Overview:
- 529 plans are specifically designed to assist in saving for the future education costs of a single beneficiary.
2. Changing Beneficiaries:
- The account owner has the flexibility to change the beneficiary to a qualifying family member of the current beneficiary without incurring tax consequences.
- This process involves completing a form on the 529 plan’s website.
3. Limitation on Number of Beneficiaries:
- A 529 plan can only have one beneficiary at a time.
- Distributions are to be utilized for qualified education expenses of the designated beneficiary.
4. Non-Qualified Distributions:
- Non-qualified distributions are subject to income tax and a 10% penalty on the earnings portion of the withdrawal.
- There is also a possibility of recapturing state income tax breaks attributable to the non-qualified distribution.
5. Managing Multiple Children's Education:
- Families with more than one child may use a single 529 plan but can take qualified distributions for only one child at a time.
- Parents can change the beneficiary to the next child attending college after finishing payments for the first child.
6. Designating Other Beneficiaries:
- Grandchildren, nieces, nephews, or anyone with future education costs may be named as a designated beneficiary.
7. Changing Beneficiary Due to Various Reasons:
- Parents may change a 529 plan beneficiary if the original beneficiary decides not to go to college or has leftover funds after graduation.
8. Tax Implications of Changing Beneficiary:
- There are no tax consequences or penalties when changing a 529 plan beneficiary to a member of the beneficiary’s family.
9. Qualified Family Members:
- Qualified family members for beneficiary changes include a broad range of relatives, such as spouses, children, siblings, in-laws, and more.
10. Process of Changing Beneficiary:
- Beneficiary change forms are available on the 529 plan’s website.
- Required information includes account details, owner's information, current and new beneficiary details, transfer amount, investment allocation instructions, and the owner's signature.
11. Name Change of Beneficiary:
- If the beneficiary undergoes a name change, the account owner should provide necessary documentation or use the beneficiary change form to update the name.
12. Changing Investment Selection:
- Account owners can choose new investment allocations when changing the 529 plan beneficiary.
- Adjustments may be needed, especially when transitioning from an age-based allocation to a new beneficiary with a different age.
13. Investment Options for K-12 Education:
- For beneficiaries using funds for K-12 education, parents should consider investing in a target portfolio, which does not adjust allocations based on the beneficiary’s age.
14. Investment Allocation Changes with Beneficiary Change:
- There is an exception allowing additional investment changes when requested simultaneously with a beneficiary change.
By comprehensively covering these concepts, I aim to empower individuals to make informed decisions when navigating the dynamic landscape of 529 education savings plans.
