Can You Transfer a 529 From Child to Grandchild?

A 529 plan is a tax-advantaged savings account for education expenses, allowing funds to grow and be withdrawn tax-free for qualified costs like tuition. Because family circumstances can change, these plans offer the flexibility to update the designated beneficiary.

Rules for Changing a 529 Beneficiary

It is permissible to change the beneficiary on a 529 plan from a child to a grandchild without incurring federal income taxes or penalties. The ability to make this change hinges on the new beneficiary’s relationship to the original one, as defined by the Internal Revenue Service (IRS). As long as the new beneficiary is a qualifying “member of the family” of the original beneficiary, the transfer is tax-free.

The list of eligible family members is detailed in IRS Publication 970 and includes the beneficiary’s child or a descendant of their child, which explicitly covers a grandchild. Other qualifying relatives include siblings, parents, stepparents, nieces, nephews, aunts, uncles, and first cousins. This allows account owners to redirect funds if, for instance, the original beneficiary receives a scholarship or chooses not to pursue higher education.

Tax and Financial Aid Implications

Tax Considerations

Changing a 529 beneficiary from a child to a grandchild is not an income tax event, but it can have transfer tax implications. The change is considered a taxable gift from the original beneficiary to the new one. If the account’s value exceeds the annual gift tax exclusion of $19,000 for 2025, the account owner may need to file a gift tax return. Married couples can combine their exclusions to gift up to $38,000.

This type of transfer can also trigger the Generation-Skipping Transfer Tax (GSTT), a federal tax on transfers to individuals two or more generations younger, like grandchildren. However, the GSTT has a high lifetime exemption of $13.99 million per individual for 2025. Because most 529 plans are well below this amount, the tax is rarely incurred.

An individual can transfer up to the lifetime exemption amount to grandchildren without the GSTT applying. It is important to know that these high exemption amounts are scheduled to be significantly reduced at the end of 2025 unless Congress passes new legislation.

Financial Aid Impact

The impact of a 529 plan on financial aid eligibility has changed due to the FAFSA Simplification Act. Previously, distributions from a 529 plan owned by a grandparent were reported as untaxed income to the student on the Free Application for Federal Student Aid (FAFSA). This treatment could significantly reduce a student’s eligibility for need-based aid.

Starting with the 2024-2025 academic year, this is no longer the case. The updated FAFSA does not require students to report cash support received from grandparents or distributions from grandparent-owned 529 plans. This change removes a major financial aid penalty.

The assets in a grandparent-owned plan are not reported on the FAFSA, and withdrawals to pay for college costs no longer negatively affect the student’s federal aid calculation. This makes a grandparent-owned 529 plan a much more attractive option for intergenerational education funding.

How to Complete the Beneficiary Change

The process of changing the beneficiary is straightforward and managed by your 529 plan provider. The first step is to contact the plan administrator to get their specific “Change of Beneficiary” form and instructions. This document can typically be downloaded from the plan’s website, or you can request it by phone.

Some plans may offer a fully online process through an account portal, while others require a physical form to be mailed or faxed. To complete the form, you will need to provide specific information for both the current and new beneficiaries. There is sometimes a small administrative fee associated with making the change. You will need to provide:

• The 529 plan account number
• The current beneficiary’s full name and Social Security Number (SSN)
• The new beneficiary’s full name and SSN
• The new beneficiary’s relationship to the original beneficiary

After filling out the form completely, you will submit it according to the plan’s instructions. Once the provider processes the request, they will send a confirmation notice reflecting the updated beneficiary. It is good practice to review this confirmation to ensure all details are correct and keep a copy for your records.