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Consider the following situation:

There is money remaining in your 529 plan after your children have finished college. Your children now have children of their own.

Can you change the beneficiary of your 529 plan to your grandchild and the ownership to your own child without incurring fees or penalties?

To me this seems like the best way to use leftover 529 money, but there may be some downside I am missing.

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From IRS Publication 970 Tax Benefits for Education

Note: Qualified tuition programs (QTPs) are also called "529 plans."

Changing the Designated Beneficiary

There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. See Members of the beneficiary's family , earlier.

Members of the beneficiary's family.

For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary.

  • Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them.
  • Brother, sister, stepbrother, or stepsister.
  • Father or mother or ancestor of either.
  • Stepfather or stepmother.
  • Son or daughter of a brother or sister.
  • Brother or sister of father or mother.
  • Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
  • The spouse of any individual listed above.
  • First cousin.

regarding ownership changes:

Rollovers

Any amount distributed from a QTP isn't taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution.

Don't report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. These aren't taxable distributions.

Example.

When Aaron graduated from college last year, he had $5,000 left in his QTP. He wanted to give this money to his younger brother, who was in junior high school. In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution.

So it appears that as far as the IRS in concerned the rollover could be done to change ownership as long as the beneficiary was in the same family.

It is possible that there could be a state tax issue with the change of ownership, if it changed from a plan in state A to one in state B; and state A treated the original contributions as a tax deduction. So check the guidelines for the specific 529 plan.

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    It's not clear to me that the text you quoted from the "rollover" section is talking about rolling the funds over into a 529 plan that someone else owns. It is still using the "beneficiary" language here. – Ben Miller Nov 4 '17 at 11:25
  • added an example of a rollover from the same section of the document – mhoran_psprep Nov 4 '17 at 12:19
  • It seems the recipient QTP needs to be established already by the sons with beneficiary the grandchild and then grandpa takes a distribution from his QTP with beneficiary the son and makes a contribution to the newly established QTP controlled by the son. – Dilip Sarwate Nov 4 '17 at 15:42

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