Plan For College

Friday, July 20, 2012

How to Change the Beneficiary in a 529 Plan

Many times 529 plan owners may need or want to change the beneficiary on their plans.  It could be due to the beneficiary not going to school or dropping out.  It could be that the student has a falling out with the owner of the 529 plan or for other reasons,  When a situation occurs that causes the owner of the 529 plan to change the beneficiary designation, they need to know what to do in order not to run into problems with the IRS.

Most 529 plans are state-issued and their intent is to allow families to invest for college costs in a tax efficient way.  There are varying rules in place that owners of the plan must adhere to if they want to change the beneficiary of the plan.  

Some plans may require the owner to participate in the plan for a set number of years before changing the beneficiary.  Others plans may cap the age that the beneficiary can be when you open the account. Therefore, since many 529 plan rules may vary, you should thoroughly investigate the rules of your specific plan to see if your intended change will be allowed.

Before changing the beneficiary you need to know whether or not the new beneficiary is eligible. According to 529 rules, you are restricted to choosing someone who is a member of the same family as the original beneficiary.  Same family members can be confusing to most individuals.  Same family members normally includes immediate members, as well as in-laws, first cousins,  half-siblings, etc.  You can change the beneficiary to be yourself as well.  If you change your beneficiary to anyone other than a member of the old beneficiary’s family the owner of the 529 plan could pay taxes and penalties.

In other words, according to 529 rules, if you change the 529 beneficiary to someone outside of the original beneficiary's qualified family, the entire account value is considered to have been distributed and becomes taxable to the account owner.

If you want to change the beneficiary of your 529 plan, you should contact your financial services institution or the organization that is administrating the plan and let them know you have selected a new eligible beneficiary.

You need to tell the plan administrator that you wish to make a beneficiary change.  The administrator should have the capability to make the beneficiary change and provide you with the paper work to complete your request. 

If you are the account owner, you are not required to notify, report, or get the permission of the original beneficiary to make any changes.  The plan administrator may ask you for information as if you are opening a new account, and in some cases, may issue a new account number for the 529 plan.

What will you have to provide to the plan’s administrator?

The 529 plan owner will have to provide his or her name, address, date of birth and Social Security number.  The same information will have to be given on the new beneficiary as well.

Many 529 plans will ask you to review the investment allocation of the account to better reflect the needs of the new beneficiary.  After all necessary paper work has been completed and submitted, the beneficiary change will be completed.


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