18 May Changing beneficiaries on your 529 plans
Q. I have a college freshman and his college will cost $45,000 a year for the next three years. His 529 Plan only has $100,000 left in it, which isn’t enough. I also have a 14-year-old with $150,000 in his plan. Should I change the beneficiary to let the younger one’s plan pay for the balance of the older one’s education, and then worry about borrowing for the younger one later?
— Working it out
A. You’re living through what many 529 plan owners with multiple children consider.
It’s a sound approach, said Frani Feit, a certified financial planner with Tradition Capital Management in Summit.
Feit said the benefit of a 529 plan is to grow assets invested for qualified education expenses. When the money is withdrawn, there is no federal or state tax on these funds.
“By changing the beneficiary of the younger child’s plan to the current college freshman, you continue to utilize current, designated education specific funds,” she said.
Given that you have four-plus years to save additional money for the younger child, you should continue to invest to make up for the anticipated tuition shortfall,” Feit said.
This can be accomplished in a taxable account or you can continue to add to a 529 plan – especially if the state plan they use offers a state income tax deduction for the contributions, she said.
New Jersey doesn’t offer that deduction.
“Logistically, the parents can roll over a portion of the funds from the younger child’s plan to the college student’s 529, but need to be mindful of the amount needed as rollovers for the same beneficiary are permitted once during a 12-month time frame,” Feit said.
Each 529 plan has some unique characteristics so it’s important to check with the plan sponsor when making a change, she said.
Another consideration is what would happen if your 14-year-old decides not to attend college.
“The earnings growth is subject to income tax plus a 10 percent penalty and any funds withdrawn contain a pro-rata allocation of both principal and earnings,” Feit said. “The penalty is not assessed if the 529 beneficiary receives a scholarship, is disabled, dies or attends a U.S. military academy, however, income taxes still apply.”
When thinking about college costs, Feit said, 529 plan updates now allow funds used to pay for computers, related equipment and internet access to be considered as qualified educational expenses. There are exceptions: sports and gaming software are a no-go and bundled cable provider services need to be broken out, she said.
“Bottom line in this scenario, use the 529 funds to pay for college and continue to save for the difference,” she said.
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This story was first published in May 2017.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.