Who can be a beneficiary of a 529 plan?

Section 529 of the Internal Revenue Code provides that any individual, regardless of age, can be a designated beneficiary of a 529 plan. However, states can impose more restrictive requirements. For example, some plans may require that the beneficiary be younger than a certain age or grade in school.

A 529 account can have only one beneficiary. If you have two or more children, you might opt to open a separate 529 account for each child. In addition, a family relationship between the account owner and the beneficiary is not required. So, for example, you could open an account for the child of a friend. And under some 529 plans, you can be both the account owner and beneficiary of the account. This can be useful if you plan to attend college or graduate school in the future, or if you are planning for your future children. Check the specific beneficiary rules of any plan you're considering.

What if you need to change the beneficiary? Generally, you can change the beneficiary of a 529 account without penalty as long as the new beneficiary is a family member of the old beneficiary. Members of the family include children and their descendants, step-children, siblings, step-siblings, parents, step-parents, nieces, nephews, aunts, uncles, first cousins, and in-laws of the original beneficiary. Keep in mind that while there is no penalty for changing the beneficiary from one family member to another, gift taxes and generation-skipping transfer taxes might result. Also, some plans may charge an administrative fee to process the change.

Note: Before investing in a 529 plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses, which contain this and other information about the investment options, underlying investments, and investment company, can be obtained by contacting your financial professional. You should read these materials carefully before investing. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also the risk that the investments may lose money or not perform well enough to cover college costs as anticipated. Investment earnings accumulate on a tax-deferred basis, and withdrawals are tax-free as long as they are used for qualified education expenses. For withdrawals not used for qualified education expenses, earnings may be subject to taxation as ordinary income and possibly a 10% federal income tax penalty. The tax implications of a 529 plan should be discussed with your legal and/or tax professionals because they can vary significantly from state to state. Also be aware that most states offer their own 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers. These other state benefits may include financial aid, scholarship funds, and protection from creditors.