Source: The College Investor
529 plans can be confusing, and 529 plan ownership rules don't make it any better.
529 plans provide a tax-advantaged way to save for education costs. Generally, parents or grandparents open up 529 accounts to build up a war chest for their child, the plan beneficiary, to eventually use on college or other educational costs.
Since the primary contributor to a 529 isn’t the beneficiary of the account, the ownership rules might seem confusing, which is why we're clarifying 529 plan ownership rules in this guide.
529 Plan Ownership Rules
There are two key parties in a 529 plan: the owner and the beneficiary.
The account owner is the person who opens a 529 plan. Although anyone can open a 529 plan to save for future educational costs, usually, a parent or grandparent opens it for a particular child. However, adult learners can also open a 529 plan to save for their own education.
Notably, 529 plans usually only allow a single owner. If you are married, this means one spouse maintains full legal control of the account. If the couple divorces, the spouse who retains ownership of the account can withdraw the funds.
The beneficiary is the person who will use the 529 plan, typically the child. However, you can open a 529 plan for yourself and be BOTH the owner and beneficiary.
Can I Change The Beneficiary Of A 529 Plan?
Yes, it’s possible to change the beneficiary of a 529. Generally, this involves a bit of paperwork from the plan’s administrator. But the new beneficiary must fall within the IRS’s specific definition of family members.
Eligible family members of the beneficiary include:
- The beneficiary’s spouse
- Child or grandchild of the beneficiary
- Brother, sister, and stepsiblings of the beneficiary
- The father or mother of the beneficiary
- A stepfather or stepmother of the beneficiary
- A niece or nephew of the beneficiary
- An aunt or uncle of the beneficiary
- Any first cousin
- A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law of the beneficiary
- The spouse of any qualifying individual listed above
Can I Change Ownership Of A 529 Account?
Whether or not you can change ownership of a 529 varies from state to state. In some states, you can change the owner of the 529 account under certain situations. For example, if a couple is divorcing, that might open the door to changing the 529 account’s owner.
Generally, it’s possible to set up a trustworthy successor account owner. If the original account owner dies, ownership of the 529 account can be passed to the designated successor.
Related: How To Rollover A 529 Plan
Who Can Contribute To A 529?
When you open a 529 account, you can make contributions into the account. It’s also possible to allow others to make contributions to the plan. For example, an aunt might make a plan contribution as a birthday present. Although the contributions are appreciated, the new contributor won’t gain any control over the account funds.
We're huge fans of 529 plan gifting, and tools like Backer make this really easy!
Who Can Make Investment Decisions For A 529 Account?
Account owners have the ability to make investment decisions for a 529 account. Beneficiaries and other interested parties cannot make investment changes within a 529 account.
What Actions Can A Beneficiary Take?
As the designated beneficiary of a 529 plan, you aren’t expected to make contributions to the account. However, as you progress through high school, it’s often a good idea to keep the owner of your 529 account informed of your plans. Since the account owner is likely a parent or grandparent, they will likely be excited to learn about your future plans.
For example, let’s say you plan on attending trade school, that could be a significantly more affordable option, which means the plan owner might be able to stop tucking away more funds. Alternatively, you might plan to attend a private college, which may or may not be within reach of the 529 funds. Discussing your plans ahead of schedule can help you avoid uncomfortable surprises in the future.
It’s important to realize that the account owner can choose to remove funds from the 529 account at any time. For example, they might decide to divvy up the funds between you and your other siblings.
Generally, you’ll need to have the account owner withdraw funds for qualified expenses. Although they might choose to move the funds directly into your bank account with the expectation that you’ll use the funds for school costs, they could also choose to send the funds directly to the school.
529 Custodial Accounts
If your account owner set up a 529 custodial account, there’s a slight twist. In this case, the account is managed by the owner until you reach the age of majority in your state, usually 18. After reaching the age of majority, the beneficiary can assume control of the 529 plan and use the funds as they wish.
After gaining custodial control, you usually cannot change the beneficiary. But you can make withdrawals for qualified expenses.
The Bottom Line
Opening a 529 account offers an excellent way to set aside funds for a loved one’s educational pursuits. Before you dive into opening an account, make sure to read the fine print of your state’s available 529 offerings.
Once the account is open, do your best to hit your 529 savings goals to fund future college costs.
Editor: Colin Graves Reviewed by: Robert Farrington
Sarah Sharkey is a personal finance writer who covers banking, credit, student loans, and insurance for The College Investor. She has written for leading financial outlets including Bankrate, Business Insider, and more, helping readers make confident choices about borrowing, saving, and building wealth.
Sarah holds both a bachelor’s and a master’s degree from the University of Florida, and her background in management and research informs her clear, practical approach to complex financial topics.