How and When to Transfer 529 Plan Savings to Another Beneficiary
Initiating a 529 Plan Beneficiary Change Is Not Complicated
Paying for college is one of the largest investments a parent can make. The average annual cost of tuition and fees at a four-year, public university tallied $9,970 for in-state students and and $25,620 for out-of-state students during the 2017-18 academic year. Those figures don't include additional costs for room and board, books or meals.
A 529 college savings plan can be a helpful tool in planning for those costs.
These plans offer a tax-advantaged way to save for college, beginning as early as birth. The 2017 Tax Cuts and Jobs Act recently expanded the guidelines for 529 plans, allowing parents to withdraw up to $10,000 per year from these plans for private or religious elementary and secondary education expenses.
But what happens if your student doesn't use all of the money you've saved in a 529 plan on their behalf? Or, what if they opt not to attend college at all? Ordinarily, withdrawals from a 529 savings plan for anything other than qualified education expenses would be subject to a 10 percent tax penalty and regular income tax. There is, however, a solution for avoiding a tax bite: changing the plan's beneficiary.
529 Change Beneficiary Rules
The Internal Revenue Service (IRS) has specific guidelines for changing the beneficiary of a 529 savings plan. Fortunately, making the change isn't an overly complicated process.
The most important thing you need to keep in mind is that the new designated beneficiary must be a qualified individual. A qualified individual is a member of the beneficiary's family. That includes:
- Their spouse
- Their in-laws, including a mother-in-law, father-in-law, brother-in-law or sister-in-law
- Their children, including step-children, foster children or adopted children
- Their siblings, including step-siblings
- Their nieces or nephews
- Aunts and uncles
- First cousins
Remember, that as the account owner, you're not the beneficiary. But, if you're transferring 529 plan savings to someone else, you can choose yourself or your spouse to be the beneficiary going forward. If your child has a stepparent, they can also be named as a beneficiary.
As long as the new beneficiary meets the requirements for being a member of the old beneficiary's family, no tax penalty is triggered. But, if you're transferring a 529 to anyone who doesn't fit the family mold, it's treated as a non-qualified withdrawal. In that scenario, both the 10 percent penalty and ordinary income tax would apply.
How to Change a 529 Plan Beneficiary
Making a 529 change of beneficiary is as simple as filling out the appropriate paperwork with your plan administrator. You have to provide your name and Social Security number, as well as the names and Social Security numbers of both your current and new beneficiaries. You'll have to indicate the relationship between the two beneficiaries, the amount you're transferring, where these funds should be transferred to and how you'd like them to be invested.
You have the option of changing the designated beneficiary on an existing account or establishing a new 529 plan, which will receive the transfer on behalf of your new beneficiary. If you're taking money from one 529 plan and moving it into another, it's best to have the current plan administrator complete the transaction for you. If you were to take a distribution from a 529 plan directly and fail to roll it into the new plan within 60 days, the transaction would count as a non-qualified taxable withdrawal.
Why Changing Beneficiaries Makes Sense
Unlike another college savings option, the Coverdell Education Savings Account, 529 plans don't put a time limit on how long you can save. With a Coverdell ESA, for example, you're required to withdraw all funds by the beneficiary's 30th birthday; otherwise, you'll owe a large tax penalty on any remaining funds.
Being able to change beneficiaries with a 529 plan not only allows you to avoid taxes but, it also allows your savings to continue growing on a tax-advantaged basis. If your child, for example, graduates college with $20,000 still in their 529 plan, you could name yourself as the beneficiary temporarily and continue making regular contributions. Once they have a child of their own, you can then transfer the plan to them instead. In the meantime, the account has increased in size, both through your regular contributions and returns generated by your investments.
Remember to Review Your Investment Choices
Individual 529 plans can vary widely in terms of how savings can be invested, but target-date funds are a popular option. These funds feature a preset asset allocation that adjusts over time as the designated beneficiary gets closer to college age. If you're transferring a 529 account from your 22-year-old college grad to their five-year-old niece, you'll need to update your asset allocation to reflect their longer timeline until they go to college. And, as you consider various funds, take time to check the fees and performance of each one to find the right balance between cost and returns.