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Who Controls 529 Money

Kimberly Lankford

If grandma contributed money to a 529 plan and then, after separation/divorce of the parents, withdrew the money prior to the child's 18th birthday, could the child contest the withdrawal in court?



If grandma contributed money to a 529 plan and then, after separation/divorce of the parents, withdrew the money prior to the child's 18th birthday, could the child contest the withdrawal in court?

You'd generally have a tough time getting the money. In most cases, the owner of the 529 account can change the beneficiary to another relative without any trouble. In fact, that's one of the big attractions for grandparents, who can switch the 529 to another grandchild if one gets a full scholarship or doesn't end up going to college -- or for any reason.

You can make the change without any income-tax consequences as long as the new beneficiary is a member of the original beneficiary's family -- including a child, brother, sister, stepbrother or stepsister, father or mother, stepfather or stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law, or the spouse of any of those people, or a first cousin (enabling grandma to switch the money to another grandchild who isn't a brother or sister). For the full list, see IRS Publication 970, Tax Benefits for Higher Education.

And if grandma doesn't mind paying taxes and penalties, she can even take the money back for herself. "Unless it is a custodial 529, the beneficiary has no rights to the money in a 529," says Joe Hurley of Savingforcollege.com.

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That one exception he mentions is if the money had originally been in a custodial account for the child and then was rolled over into a 529. In that case, it is legally the child's money, and you can take grandma to court to try to get it.

For more information about 529 plans, including a list of our favorites, see Find the Best 529 Plan.

Got a question? Ask Kim at askkim@kiplinger.com.




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