When you set up a 529 college savings plan, you’ll name a beneficiary. But what if you name Jill, who gets a full scholarship, while her brother Jon needs the cash to attend an Ivy League college?
Wrong way: Have the 529 custodian send you, the 529 account owner, a check for Jon’s college costs. Then you can write a tuition check for the same amount to the Ivy League school.
The IRS is likely to say that the 529 distribution is taxable because the distributed funds would not be used for the 529 beneficiary’s (Jill’s) qualified higher education expenses.
Right way: First change the beneficiary of the 529 plan from Jill to Jon. Then–in the same calendar year–take distributions for Jon’s qualified higher education expenses. As long as those expenses equal or exceed the distribution, you will owe no tax on the 529 withdrawal.
As the account holder, you can change the beneficiary at any time. The new beneficiary must be a member of the family of the previous beneficiary. If the new beneficiary is a sibling of the prior beneficiary, there will be no gift tax consequences.
