Quick overview
Changing a 529 plan beneficiary is a straightforward tool families use when schooling plans, scholarships, or family needs change. The Internal Revenue Code and IRS guidance allow tax-free beneficiary changes as long as the new beneficiary is a “member of the family” of the current beneficiary (see IRS Publication 970). This article explains when a change makes sense, who qualifies, step-by-step actions, state-plan pitfalls, and real-world examples from practice.
Why change a 529 beneficiary?
- The original beneficiary received a scholarship, decided not to go to college, or attended a lower-cost school.
- You want to preserve the tax-advantaged status and keep funds in the family.
- You’re consolidating accounts for siblings or moving funds to a younger child.
Because account ownership usually stays with the original owner (the parent or grandparent), you can reassign the beneficiary to another qualifying family member without moving money out of the plan.
Who counts as a “qualified family member”?
IRS Publication 970 defines a qualified family member for 529 purposes; it generally includes: the beneficiary’s spouse, ancestors and descendants (parents, grandparents, children, grandchildren), siblings, nieces and nephews, aunts and uncles, in-laws, and first cousins (consult the plan and IRS text for exact definitions) (IRS Pub. 970).
If the new beneficiary is a qualified family member, transferring beneficiary status is treated as a non-taxable event. If not, distributions to that person will trigger taxation on the earnings portion and usually a 10% additional tax on those earnings (unless another exception applies).
Sources: IRS Publication 970: Tax Benefits for Education (see the 529 section).
Step-by-step: How to change the beneficiary
- Confirm your objective and check plan rules. Each state plan has its own paperwork and may call this a “change of beneficiary” or “designation of new beneficiary”. Review the plan’s PDF forms and instructions.
- Verify the new beneficiary’s eligibility. Confirm they meet the IRS family-member definition and check any age or residency requirements your plan may impose.
- Gather required information: new beneficiary’s full legal name, Social Security number or Tax ID, date of birth, and relationship to the current beneficiary.
- Complete the plan’s beneficiary change form. Many plans allow online changes through the account portal; others require a signed paper form.
- Submit documentation if requested. Some advisor-sold plans or prepaid tuition contracts may ask for additional paperwork.
- Keep a copy and confirmation. Save the signed form or transaction confirmation and update your estate or financial plan.
In my practice I advise clients to request a confirmation letter or PDF and retain it with college-planning records. Mistyped SSNs or names are a surprisingly common source of later headaches.
State rules, tax deductions, and recapture risks
Although the federal tax treatment (per IRC 529) allows family-member beneficiary changes without federal tax consequences, state tax rules vary:
- Some states offer income-tax deductions or credits for 529 contributions. If you claimed a state tax benefit and later change the beneficiary or roll funds to a different type of account, your state might recapture prior deductions or require an adjustment. Always check your plan’s state-specific FAQ or contact the plan administrator.
- Moving money between state plans (rollovers) is generally allowed once per 12 months without tax consequences; rules differ by plan and state. See your plan’s rollover rules and any state tax implications.
For state-specific guidance, consult your plan’s website or the state 529 plan disclosure documents.
Useful internal resources: see our guides on Rolling Over Old 529s: When and How (https://finhelp.io/glossary/rolling-over-old-529s-when-and-how/) and 529 Plan Tax Traps to Avoid (https://finhelp.io/glossary/529-plan-tax-traps-to-avoid/).
Scholarship and special exceptions
When the beneficiary receives a scholarship, you have choices:
- Leave funds in the account for future education of the beneficiary (e.g., graduate school).
- Change the beneficiary to a qualified family member.
- Withdraw funds for non-qualified expenses: the earnings portion will be taxable and generally subject to a 10% additional tax. However, IRS Publication 970 provides an exception that waives the 10% additional tax for withdrawals that correspond to scholarship amounts—earnings are still subject to income tax but not the additional 10% penalty.
If the beneficiary passes away, most plans allow the account owner to name a new beneficiary, transfer the account to the beneficiary’s estate, or roll funds to another qualifying family member. Each plan’s rules differ; contact the plan administrator.
Financial aid and ownership considerations
Beneficiary changes do not alter account ownership. Ownership matters for financial aid:
- Parent-owned 529s are treated as parental assets on the FAFSA and have a relatively small effect on aid eligibility (generally up to 5.64% of parental assets are included in the expected family contribution calculation).
- Grandparent-owned 529s were counted differently by the FAFSA in prior years; recent FAFSA changes and timing of distributions affect expected aid—distributions made directly to the student or on behalf of the student can be counted as untaxed income to the student on the next year’s FAFSA (which can reduce aid eligibility). Always coordinate distributions and FAFSA timing.
If your goal in changing beneficiaries is to affect financial aid, consider who owns the account. Changing the beneficiary alone rarely changes the aid outcome because ownership and timing of distributions are the bigger drivers.
Authoritative reference: Federal Student Aid (studentaid.gov) guidance on how assets and income affect FAFSA.
The SECURE 2.0 Roth rollover option (brief note)
SECURE 2.0 included a provision to permit rollovers from 529 plans to Roth IRAs beginning in 2024, subject to limits and conditions (lifetime cap and account-age rules). This rollover generally must go to the beneficiary’s Roth IRA (not to a different person) and is subject to Roth IRA contribution limits and other constraints. Because the rules have technical limits (e.g., possible account-age requirements and lifetime caps), consult plan rules and a tax advisor before pursuing this option.
We have a detailed explainer at: 529 to Roth IRA Rollover (https://finhelp.io/glossary/529-to-roth-ira-rollover/).
Common mistakes and how to avoid them
- Assuming any new beneficiary is okay. Always verify the person is a “member of the family” described by the IRS.
- Forgetting to check state tax recapture after a beneficiary change or rollover. State rules differ widely.
- Not documenting the change. Keep the form, confirmation and any correspondence.
- Ignoring FAFSA timing. Unexpected distributions can reduce future aid eligibility.
In practice, I recommend clients do a short checklist: verify eligibility, check state tax rules, complete and save forms, and notify any financial planners or college-funding advisors.
Practical examples (real-world scenarios)
- Sibling transfer: A parent owns a 529 initially for Child A. Child A receives a large scholarship. The parent changes the beneficiary to Child B (a sibling). No federal tax consequence because Child B is a qualifying family member; check state tax rules for any recapture.
- Scholarship withdrawal: A student receives a $10,000 scholarship and the family withdraws $10,000 from the 529. The earnings portion of that withdrawal will be taxable, but the 10% penalty is generally waived for the scholarship amount (IRS Pub. 970).
- Changing ownership vs. beneficiary: A grandparent who owns the 529 wants to avoid FAFSA impact. Changing beneficiary to a different person does not remove the account from grandparent ownership. Transferring ownership could create gift-tax issues and should be done only after talking to a tax advisor.
Checklist before you submit a change
- Confirm new beneficiary meets IRS “family member” definition.
- Review your state 529 plan’s rules and tax-treatment for beneficiary changes and rollovers.
- Complete the plan’s form and verify identity fields (SSN/TIN).
- Save confirmations and update your estate/college-planning documents.
- Consult a tax or financial advisor if you have complex estate, gift-tax, or financial-aid concerns.
Professional takeaway
Beneficiary changes are an accessible and tax-efficient way to keep 529 funds working for your family. In my experience working with families, the most common problems are paperwork errors, overlooked state tax rules, and unintended financial-aid consequences. A simple pre-check and good recordkeeping solves most of these issues.
Disclaimer: This article is educational and does not constitute legal, tax, or financial advice. Tax laws change; consult IRS Publication 970, your state 529 plan documents, and a qualified tax or financial advisor for advice specific to your situation.
Authoritative sources and further reading
- IRS Publication 970, Tax Benefits for Education (see the 529 section): https://www.irs.gov/pub/irs-pdf/p970.pdf
- Federal Student Aid, How Assets Affect Aid Eligibility: https://studentaid.gov/understand-aid/requirements/eligibility
- FinHelp guides: Rolling Over Old 529s: When and How (https://finhelp.io/glossary/rolling-over-old-529s-when-and-how/) and 529 Plan Tax Traps to Avoid (https://finhelp.io/glossary/529-plan-tax-traps-to-avoid/) and 529 to Roth IRA Rollover (https://finhelp.io/glossary/529-to-roth-ira-rollover/).
If you want, I can convert the checklist into a printable one-page form tailored to your state’s 529 plan.
