Keith Mack
A 529 plan is a tax-effective way to save for a child's education. The plan is jointly owned by a beneficiary and a custodian, who is usually the student's parent. The beneficiary is the person whose future education expenses will be paid from the account. According to the IRS, a member of a 529 plan beneficiary's family includes the beneficiary's daughter-in-law, meaning that you can claim a daughter-in-law on a 529 plan.
| Characteristics | Values |
|---|---|
| Who can be a 529 plan beneficiary? | Anyone, including relatives, friends, and the account owner themselves |
| Who can be a qualifying family member beneficiary? | Spouse, son, daughter, stepchild, foster child, adopted child, descendant, son-in-law, daughter-in-law, siblings, brother-in-law, sister-in-law, father-in-law, mother-in-law, father, mother, stepparent, aunt, uncle, niece, nephew, first cousin, or their spouses |
| Who is the custodian? | The person who purchases the 529 plan and controls the funds |
| Who is the beneficiary? | The student or future student for whom the plan is intended to provide benefits |
| Can the beneficiary have managerial authority over the account? | Yes, if they are also the account owner or if the custodian bestows authority on them |
| Can the beneficiary be changed? | Yes, to another family member of the current beneficiary without tax consequences |
| Can funds be rolled over to another plan? | Yes, for the benefit of the same beneficiary or a member of the beneficiary's family |
| Are earnings subject to federal tax? | No |
| Are earnings subject to state tax? | Generally not, when used for the qualified education expenses of the designated beneficiary |
| Are contributions deductible? | No |
| Is there a limit to the number of plans? | No |
| Are there gift tax consequences? | Yes, if contributions plus any other gifts to a beneficiary exceed $14,000 during the year |
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What You'll Learn
Daughter-in-law qualifies as a beneficiary
A 529 plan is a tax-effective way to save for a child's education. The plan is jointly owned by a beneficiary and a custodian. The beneficiary is the person whose future education expenses may be paid from the account. The beneficiary has no managerial authority over the account unless they are also the account owner or the custodian bestows authority on them.
The 529 plan is designed to save for a single designated beneficiary, who is usually the student or future student for whom the plan is intended to provide benefits. However, the beneficiary can be changed at any time without tax consequences, as long as the new beneficiary is a family member of the current beneficiary.
According to the IRS, a member of a 529 plan beneficiary's family includes the beneficiary's daughter-in-law. This means that a daughter-in-law qualifies as a beneficiary and you can claim her as one.
It is worth noting that there are no income restrictions on the beneficiary, and there is no limit to the number of plans you can set up. Additionally, contributions can be made by any third party, and there are no age limits or income phase-outs on contributions. However, contributions cannot exceed the amount necessary to provide for the qualified education expenses of the beneficiary, and there may be gift tax consequences if contributions to a particular beneficiary exceed a certain amount ($14,000 in 2018, $15,000 in 2019).
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Tax-free 529 distributions
A 529 plan is a "qualified tuition program" that allows parents to save for their children's college funds, grow their savings tax-free, and withdraw money tax-free for qualified education expenses.
Qualified Education Expenses
Qualified education expenses include tuition, fees, books, supplies, equipment, computers, and room and board at an eligible educational institution. The beneficiary's family can also use the funds for internet access and any related services.
Non-Qualified Education Expenses
If 529 funds are used for non-qualified education expenses, the earnings portion of the withdrawal may be subject to income taxes and a 10% federal tax penalty. For example, if the withdrawal is used to buy a car, the earnings are taxable.
Distribution Rules
To avoid penalties, it's important that withdrawals from a 529 savings account match the payment of qualifying expenses in the same tax year. If the timing is off, the withdrawal is considered non-qualified and may be taxable.
Distribution Options
There are several options for distributing 529 funds:
- Pay the school directly from the 529 account.
- Transfer funds from the 529 account to a bank or brokerage account and then pay the school.
- Withdraw funds and reimburse yourself.
- Distribute funds from the 529 account to the beneficiary, who can then pay the school.
Rollovers
529 funds can be rolled over into another account with the same beneficiary or a sibling's 529 plan account without tax consequences. Funds can also be rolled over to another family member, such as a son-in-law, daughter-in-law, or niece/nephew.
Year-End Catch-Up Distributions
If you're unsure about how much you'll spend in a given year, you can make a year-end "catch-up" distribution. This involves determining how much was spent on qualified expenses during the year and making a distribution from the 529 plan to maximize tax savings.
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Qualified education expenses
- Tuition fees
- Books and supplies that are required for a course of study
- Computers and related peripheral equipment, such as a printer
- Student activity fees that are required to enroll or attend a school
- Fees, books, supplies, and equipment required for participation in a registered apprenticeship program
- Off-campus housing
- Special needs services
- College application or testing fees
- Transportation/travel costs
- Health insurance
- Extracurricular activity fees
- Room and board (if enrolled on a less than half-time basis)
- Home-schooling expenses
It is important to note that not all education expenses qualify for free withdrawals, and misusing 529 plan withdrawals can result in penalties. The rules for some of these expenses can also be quite complicated, so it is always good to check with the school or a tax professional to avoid accidentally taking a non-qualified distribution.
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Changing 529 beneficiaries
A 529 plan is a qualified tuition program that allows people to save for future education costs. It was created by Congress in 1996 and is named after section 529 of the Internal Revenue Code. While the benefit of a 529 plan is the tax-free withdrawal of earnings, contributions to a 529 plan are not deductible.
A designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. The plan owner can name anyone as a beneficiary, including themselves, a relative, or a friend. There are no income restrictions on either the contributor or the beneficiary, and there is no limit to the number of plans that can be set up.
The beneficiary is generally not limited to attending schools in the state that sponsors their 529 plan, although it is important to check with a plan before setting up an account. There are no tax consequences if the designated beneficiary is changed to another member of the beneficiary's family. For example, funds from a 529 plan for one child can be rolled over into a sibling's plan without penalty.
To change the beneficiary on a 529 plan, the plan owner will need to complete a beneficiary change form, which can usually be found on the 529 plan's website. This form can often be completed online, but sometimes it needs to be printed and submitted by mail. The following information will be required to complete the form:
- Current beneficiary's name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- New beneficiary's name and Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN)
- Amount of funds to be transferred to the new beneficiary
If the beneficiary has changed their name, a copy of the court order changing the beneficiary's name should be provided. Additionally, the 529 plan account owner may choose to select new investment allocations when changing the beneficiary. For example, if the new beneficiary will be using the funds for K-12 education, the owner may consider investing the funds in a target portfolio.
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529 plan contributions
A 529 plan is a tax-advantaged account with high contribution limits that allow you to save for higher education. It is a "qualified tuition program" that was created by Congress in 1996 and is named after section 529 of the Internal Revenue Code. Each state has its own 529 plan, and while there are no yearly contribution limits, each state sets its own lifetime contribution limit per beneficiary, typically ranging from $235,000 to over $550,000.
Contributions to a 529 plan are not deductible, but earnings are not subject to federal tax and are generally not subject to state tax when used for the qualified education expenses of the designated beneficiary. Qualified expenses include tuition, fees, books, room and board at an eligible educational institution, and tuition at elementary or secondary schools.
The designated beneficiary is usually the student or future student for whom the plan is intended to provide benefits. There are no tax consequences if you change the designated beneficiary to another member of the family, and funds can be rolled over to another plan for the benefit of a family member without penalty. For example, you can transfer funds from a 529 plan for one of your children into a plan for a sibling, or other family members such as a son-in-law, daughter-in-law, or niece/nephew.
The amount you contribute to a 529 plan depends on various factors, including your distribution time frame and your financial situation. It is important to consider your own financial stability and retirement funding before contributing to a 529 plan. Additionally, contributions to a 529 plan are considered gifts for federal tax purposes, and there may be gift tax consequences if your contributions, plus any other gifts, to a particular beneficiary exceed a certain amount. This amount was $14,000 in 2018, $18,000 in 2024, and $19,000 in 2025. However, there is a strategy known as 5-year gift-tax averaging, which allows a donor to make a larger tax-free contribution to a 529 plan spread evenly over five years. For example, in 2025, an individual can contribute up to $95,000 in a single year to a particular 529 plan without affecting their lifetime gift tax exclusion.
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Frequently asked questions
A 529 plan is a tax-advantaged financial account that can be used to pay for qualified higher education expenses. Earnings are not subject to federal tax and are generally not subject to state tax when used for the beneficiary's qualified education expenses.
The beneficiary of a 529 plan is usually the student or future student for whom the plan is intended to provide benefits. According to the IRS, a member of a 529 plan beneficiary's family includes the beneficiary's spouse, son, daughter, stepchild, foster child, adopted child, descendant, son-in-law, daughter-in-law, siblings, brother-in-law, sister-in-law, father-in-law, mother-in-law, father, mother, aunt, uncle, niece, nephew, first cousin, or their respective spouses.
Yes, you can change the beneficiary of a 529 plan as often as you like, but the new beneficiary must be a qualifying family member of the original beneficiary. There are no tax consequences for changing the beneficiary to another member of the family.
Yes, 529 plans can be used for more than just college tuition. 529 plans can also be used to pay for up to $10,000 per year for K-12 tuition, day-to-day expenses for a college student, books, supplies, internet access, software, and computers. Additionally, 529 plans can be used to pay off the beneficiary's student loans of up to $10,000 and up to $35,000 can be rolled over from a 529 plan into the beneficiary's Roth IRA.
