When You Should Not Change Your 529 Plan Beneficiary
529 plans offer the flexibility to change the beneficiary to a qualifying member of the current beneficiary’s family without tax consequences. Parents may change the 529 plan beneficiary as a strategy to reduce tax liability on unused funds, investment changes or rollovers. However, in some cases changing the beneficiary is not necessary to minimize tax consequences.
Here are situations when you should consider keeping your current 529 plan beneficiary.
Your child decides not to go to college
Many parents worry about what will happen to their 529 plan savings if their child decides not to attend a traditional 4-year college. But, the reality is that most careers require some sort of post-secondary education, so the current 529 plan beneficiary may still be able to take advantage of 529 plan benefits.
Money saved in a 529 plan can be withdrawn tax-free to pay for post-secondary education at any eligible institution, including trade schools and community colleges. If a student attends a college that offers a free tuition program, 529 funds can be used to pay for other qualified expenses, such as textbooks, computer equipment and room and board if the student is enrolled on at least a half-time basis.
Students may also decide to take a gap year after high school before making a decision about the type of college to attend. There are no time limits imposed on 529 plan accounts, so it might make sense to hold on to the funds in case the child decides to pursue a college degree certificate in the future.
You paid your child’s senior year college tuition
Parents may be tempted to hand down their child’s 529 plan after they pay the final tuition bill. However, there may be additional qualified education expenses that come up later in the year.
For example, if a student lives off campus and is enrolled in an eligible college program on at least a half-time basis, rent and other room and board costs are a qualified 529 plan expense. For off-campus housing, qualified room and board costs must be less than or equal to what is included in the college’s cost of attendance (COA) allowance for room and board.
Your child graduates from college
Many students continue their education after obtaining a 4-year college degree. If there are leftover funds in a 529 plan after a student completes college, parents may consider keeping the 529 plan account in case the student decides to pursue a graduate or professional degree. The student may also use 529 plan money to pay for continuing education, which may be required in certain occupations.
You want to transfer 529 plan funds to a sibling’s 529 plan account
It is possible to change a 529 plan beneficiary to a sibling without tax consequences, but parents may want to consider a rollover if the sibling has an existing 529 plan account. Rolling the funds into a sibling’s existing 529 plan account may:
- Make record-keeping easier since the sibling will have only one 529 plan account
- Eliminate the need to reallocate investments in the first 529 plan to meet the sibling’s objectives
You want to help a close friend pay for college
Families with leftover funds in a 529 plan may change the beneficiary to an individual who will attend college, as long as the individual is a qualifying member of the beneficiary’s family. Distributions used to pay for a friend’s education expenses are considered non-qualified. Non-qualified 529 plan distributions are subject to income tax and a 10% penalty on the earnings portion and recapture of state income tax breaks.
New 529 plan contributions may be directed to a friend’s existing 529 plan, or the gift giver may open a new 529 plan and name the friend as the designated beneficiary. Many 529 plan gifting platforms that allow friends and family to make secure electronic contributions.
A good place to start