Many grandparents contribute to 529 college savings accounts, which offer tax-free buildup and tax-free withdrawals for college costs. Often, the grandparent is the account owner and a grandchild is the beneficiary.
Suppose Jean Adams wants some her money back. Jean might have unexpected medical expenses. Alternatively, her grandson Kevin may have completed his education and Jean wants the money left in the 529 account.
Jean can withdraw the funds, although the earnings portion of the withdrawal will be subject to income tax and to an additional 10 percent penalty tax. That portion will be calculated by the custodian of the 529 plan.
If Kevin has finished with school and Jean has no other beneficiaries in mind, she may decide to change the account owner, if such a change is allowed by the 529 plan. (If her plan doesn’t permit a change, she can move the account to a different 529 plan) Typically, changing the account owner won’t trigger income or gift tax. Thus, Jean might name her daughter Linda or her grandson Kevin as the new account owner.