Life often takes an unexpected turn or two, which is why 529 plans are flexible and allow you to change the beneficiary. Learn more with Sootchy.
For most families, covering the cost of a college education requires starting early and setting aside funds when a future student is in their infancy. A 529 plan is one of the best tools to facilitate this strategy, as early contributions can add up over time as the investments in the account generate returns. Because a 529 plan is only allowed to be used for specific, education-related expenses, a sudden change in plans – a child no longer attending college, for instance, or receiving a scholarship that covers tuition – you may wonder what to do with the funds you’ve been saving. One possibility you might consider is using the money for another family member, but that begs the question, “Can I transfer a 529 plan to another child?” To find out, keep reading as the experts at Sootchy explain.
A 529 plan may only be able to have a single beneficiary, but that doesn’t mean only one person can ever benefit from the funds in one of these accounts. By changing the beneficiary, you can transfer a 529 plan to another child and – depending on who the new beneficiary might be – use those funds without skipping a beat. Let’s look at how to change the beneficiary of a plan below.
Most 529 plans have some kind of online portal nowadays, which you can use to manage your account or download any forms you might need. One such document is the beneficiary change form, which you may be able to complete online, though some plans require that a physical copy be printed and mailed in. To do so, you’ll likely need the following:
• The account number of your 529 plan
• The name and contact information of the account owner
• The name and Social Security Number (or Taxpayer Identification Number) of the current beneficiary
• The name and Social Security Number of the new beneficiary
• The amount that will be transferred to the new plan beneficiary
• Instructions for the allocation of funds
• The authorization – typically in the form of a signature – of the account owner
As powerful as the tax advantages of 529 plans may be, their unique benefits are often balanced by limitations designed to keep plans from being abused. One of these limitations involves the transfer of a 529 plan to another child: If you transfer the beneficiary of the plan to a child who’s not a family member, you could be hit with federal or state income taxes as well as a 10% penalty. However, if the new beneficiary of the plan is one of several relatives, you can make the transfer without issue.
As with everything, the IRS sets very specific guidelines on what constitutes a family member for the purposes of changing the beneficiary of a 529 plan tax-free. If you’re looking to transfer a 529 plan to another child, know that only the following family members can become the new beneficiary of a plan without incurring incomes taxes or the standard 10% penalty on earnings:
• A biological son or daughter
• A stepchild, adopted child, or foster child
• A son-in-law or daughter-in-law
• A niece or nephew (or their spouse)
• A first cousin (or their spouse)
Should you decide to transfer your 529 plan to another adult, you’ll have further options, including the following:
• A sibling or step-sibling
• A parent or stepparent
• A father-in-law or mother-in-law
• A grandparent
• An aunt or uncle
• A spouse
An important thought to keep in mind when choosing to transfer a 529 plan is that there may be a tax in cases where the new beneficiary is more than one generation removed from the previous one. If so, you may need to worry about a generation-skipping transfer tax; ask your plan administrator or account if you believe this could apply to you.
Aside from the obvious benefit of transferring a 529 plan to another child – being able to use the money on behalf of someone other than the original beneficiary – there are a few extra advantages to using this action.
For instance, the owner of a 529 plan is only allowed to make two changes to a plan’s investment portfolio each year, but if you change the beneficiary of a plan at the same time, then any change in investment won’t be counted toward your two-per-year limit. Another example: 529 plans can be used to help pay down student debt, but only up to $10,000 for a particular beneficiary or their sibling. By changing the beneficiary to a sibling of the original, you can circumvent this limitation and use an additional $10,000 to cover that child’s loans.
If you’ve considered the benefits of a 529 plan but worry that the funds may not be used by the original beneficiary, know that you can absolutely transfer your plan to another child. All you have to do is submit the proper paperwork to your plan administrator, and you’ll be able to spend your 529 plan funds on the education expenses of a new loved one. Download the Sootchy app today or visit us online to learn more about starting or managing a 529 plan.